Tax Credits and Subsidies

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Jason Kuznicki

Jason Kuznicki is a research fellow at the Cato Institute and contributor of Cato Unbound. He's on twitter as JasonKuznicki. His interests include political theory and history.

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318 Responses

  1. Nob Akimoto Nob Akimoto says:

    Should “economic efficiency” be the goal of public policy? The assumption seems at least partly that all benefits from taxation policy are accrued in an exclusively economic manner. Granted, almost all the training given in the field of public affairs/policy generally focuses on economic analysis of one stripe or another, with an eye towards cost/benefit analysis.

    That said, it seems to me that targeted tax breaks are a form of voucher, in that they provide incentives for a very narrow set of economic activity. And most subsidies are in themselves just cut checks. Even if they’re only usable in a certain range of activity, they help offset capital expenditures that let folks free up money to use in other ventures.

    Moreover your defining “government” as if it were some sort of monolithic decision making entity that wasn’t answerable to the intuitions of the public writ large is a bit odd. Generally so far as we can tell, long-run perception of public policy preferences seem to point in the opposition direction: people prefer tax credits over vouchers. Precisely for the reasons Wilkinson starts out with.Report

    • Avatar Jason Kuznicki says:

      Should “economic efficiency” be the goal of public policy?

      Yes.

      That said, it seems to me that targeted tax breaks are a form of voucher, in that they provide incentives for a very narrow set of economic activity. And most subsidies are in themselves just cut checks.

      Not housing vouchers, EBT, or Medicare/Medicaid.  None of these are “just cut checks.”

      It’s not terribly surprising to note how the level of paternalism seems to vary in inverse proportion to the social class of the recipient.

      Moreover your defining “government” as if it were some sort of monolithic decision making entity that wasn’t answerable to the intuitions of the public writ large is a bit odd.

      The ideas that government agents act to increase their (a) budgets, (b) authority, (c) prestige, and (d) job satisfaction are all very common in public choice theory.  In that discipline, the real arguments are about which of these goals predominate, and when, and how.

      people prefer tax credits over vouchers.

      I agree!  And why?  Because people prefer keeping their own autonomy.  Tax credits do this better.Report

      • Nob Akimoto Nob Akimoto says:

        Why should economic efficiency, over say utility maximization or externality mitigation be the goal?

        As for vouchers as part of the safety net, I think that too is as much an intuitive bit of moral reasoning by other people, rather than government in it of itself. If you asked a bunch of people on the street whether or not EBT or housing vouchers should be converted to straight cash payments, the likelihood is that you’re going to get a “no, those people will just spend it on drugs/alcohol/cigarettes”.

        That is to say, it’s not Governments that like control, it’s the people paying the taxes that want to feel like they’re allowed to impose limits on how people receiving “handouts” get to spend their money. It all boils down to the cognitive dissonance between tax credits vs. handouts. Which I think is what Wilkinson’s getting at here, no?

        I would argue that in terms of control, bureaucrats prefer being able to determine who to give money to over what that money should be spent on. In so far as this is a change from previous generations of government agents, it has as much to do with the change from public administration to public management.Report

        • Avatar Jason Kuznicki says:

          Why should economic efficiency, over say utility maximization or externality mitigation be the goal?

          Removing externalities is efficiency (or a big part of it, anyway).  So is maximizing utility (which is really just a different way of saying very much the same thing).

          If you asked a bunch of people on the street whether or not EBT or housing vouchers should be converted to straight cash payments, the likelihood is that you’re going to get a “no, those people will just spend it on drugs/alcohol/cigarettes”. That is to say, it’s not Governments that like control, it’s the people paying the taxes that want to feel like they’re allowed to impose limits on how people receiving “handouts” get to spend their money.

          You’re right.  It’s not simply that the government likes control; in many cases, the voters like controlling the lives of the poor as well.  But this is hardly an endorsement.Report

          • Nob Akimoto Nob Akimoto says:

            In theory mitigating externalities and maximizing utility are part of economic efficiency. In practice, what actually seems to happen is that both are tossed aside in favor of accounting efficiency.

            As for the second point, it’s not really an endorsement, it’s just noting that people like tax benefits for themselves, and vouchers for others.Report

            • Avatar Roger says:

              Nob,
              So the historically unprecedented increase in human prosperity is just an artifact of accounting efficiency? Odd way to think about it.Report

            • Avatar Stillwater says:

              In theory mitigating externalities and maximizing utility are part of economic efficiency. In practice, what actually seems to happen is that both are tossed aside in favor of accounting efficiency.

              See, this right here (^) needs lots more discussion. I think it’s the central divide between liberals and libertarians on domestic economic policy issues, and apart from talk about ‘getting the incentives right’ (which a liberal would be entirely amenable to!) I don’t think a libertarian has an answer to it other than a complete restructuring of government.

              I’d love to hear libertarians (once again, because I’m sorta dumb about this stuff) explain how their view in practice remedies this exact problem. And by saying that, I’ll admit I’m unpersuaded by the unintended consequences line of thought here since the question under discussion is how to correct a problem (maximizing accounting efficiencies) which would exist in any event. Report

              • Nob Akimoto Nob Akimoto says:

                My own personal experience says that it’s generally a clinging to easily quantified metrics that makes accounting efficiency a more attractive option for policymakers.Report

              • Avatar Stillwater says:

                Ahh. Maybe I misunderstood your point then. I thought you were talking about private sector accounting efficiencies.Report

              • Nob Akimoto Nob Akimoto says:

                No, it’s also true in the private sector, though voluntary certification systems have started making this actually more quantifiable.

                In general my point was more that accounting efficiency seems to be what passes for economic efficiency in general. Particularly when we’re discussing the concept of government interaction with private actors.Report

              • Avatar Stillwater says:

                Thanks for explaining. (I’ll crawl back under the rock now.)Report

              • Avatar Stillwater says:

                Maybe I misunderstood your point then.

                Hah! That’s an understatement. I’m quite sure that I did, since I don’t understand very much if anything at this level discussion!Report

              • Avatar James Hanley says:

                @Nob, In theory mitigating externalities and maximizing utility are part of economic efficiency. My own personal experience says that it’s generally a clinging to easily quantified metrics that makes accounting efficiency a more attractive option for policymakers

                Agreed.  The solution is for public policy guys like you (and me) to keep pointing out that externalities by definition are inefficiencies.

                 

                @Still, I don’t think a libertarian has an answer to it other than a complete restructuring of government.

                I don’t follow that at all.  Taking account of externalities doesn’t require a complete restructuring of government, unless you–as a liberal–are telling me that our political system as it stands is incapable of taking externalities into account. (I might be sympathetic to that argument, but I don’t think that’s where you’re going.)

                As to how libertarians’ approach “in practice” remedies the problem, I suppose that depends which one you talk to. There are, to my great dismay, any number of libertarians who are capable of understanding externalities only in the context of private property–if I dump my used motor oil in your yard, the libertarian defends you; if I dump it in the stream that flows past your property, they defend me.  That’s pretty moronic, of course.  But they do have a solution–privatize everything. They see the problem as being not just the bad actor, but the publicness, the non-ownership, of the polluted resource as being a part of the problem.  They’re not totally wrong in that, either. There’s an old saying that “everybody’s business is nobody’s business,” and for examples just look closely at the trash along any interstate.

                Now before anybody jumps on me, I’m not that extreme.  I’m the moderate libertarian.  I do believe privatization helps resolve this problem (because empirically we can demonstrate that), but I don’t think every resource can be privatized (some are just too big and complex) nor do I think it’s necessary to privatize anything that can be privatized (I’m fine with public parks, for example).  So my moderate libertarian view would be that whenever we’re engaging in regulation, we should consider economic efficiency–it’s not the only goal, but no regulation should be any more economically inefficient than absolutely necessary to achieve its purpose–and because externalities are inefficiencies, any failure to consider them means we’ve failed in our duty consider economic efficiency.  In other words, to a large extent follow the same general model we currently do, but do the analysis properly for once instead of improperly.Report

              • Avatar Stillwater says:

                So my moderate libertarian view would be that whenever we’re engaging in regulation, we should consider economic efficiency–it’s not the only goal, but no regulation should be any more economically inefficient than absolutely necessary to achieve its purpose–and because externalities are inefficiencies, any failure to consider them means we’ve failed in our duty consider economic efficiency.

                Yes. Of course. And I’m ashamed to admit I knew that, too!

                 

                 Report

              • Avatar James Hanley says:

                Of course I rarely think we should be engaging in regulation!  I’m only talking about that once or twice a century when a regulation becomes justified.  😉Report

              • Avatar Stillwater says:

                Heh. In a temporary bout of spontaneous confusion I lost track of the space between us on this issue. Thanks for helping me find it!Report

              • Avatar Brandon Berg says:

                apart from talk about ‘getting the incentives right’ (which a liberal would be entirely amenable to!)

                Except you’re not. Leftism is very explicitly about getting the incentives wrong and increasing the amount of moral hazard in society. If you screw up, we’ll bail you out. If you succeed, we’ll make you pay. You have your reasons, granted, but  blunting incentives is what you’re all about.Report

              • Avatar Kimmi says:

                Brandon,

                no, it’s not. it’s about creating the best incentives to help the best number of people. One of those is free markets. “if you screw up we’ll bail you out” … yeah, that actually allows people to take risks. Entrepreneurship plummets with this whole health care nonsense. if we bailed people out, they’d do more of it.Report

              • Avatar Brandon Berg says:

                I’m fairly certain that this is a myth. If a skilled worker starts a business and it doesn’t work out, he doesn’t go on welfare—he just gets another job.Report

              • Avatar Jesse Ewiak says:

                Unless of course, their business fails in the middle of the worst recession in sixty years.Report

              • Avatar Kimmi says:

                Obviously unfamiliar with Authors, who are rather infamous for getting hefty paychecks, once every three years or so. Figure they collect unemployment a lot…

                I think you assume that most people starting businesses are skilled workers — and that they don’t spend themselves into bankruptcy (which is NOT to say that they would go on welfare, but food stamps? Surely!)Report

              • Avatar wardsmith says:

                Kimmi, I know it is a complete waste of time to correct your misapprehensions on facts, but in point of fact Authors (by whom I assume you meant folks who write for a living, typically novels and such?) would NOT qualify for unemployment. As anyone who has actually run a business knows (and the great unwashed clearly do not), 100% of unemployment insurance is paid by the business, not the employee. Furthermore, if YOU are the business owner (as you would be if you were an author, unless you’re a journalist working at a newspaper) you are by definition disqualified from collecting unemployment. Ergo, no unemployment for “authors”.Report

          • Avatar trizzlor says:

            “You’re right. It’s not simply that the government likes control; in many cases, the voters like controlling the lives of the poor as well. But this is hardly an endorsement.”

            But this distinction is important in how you approach policy. If government inherently tends towards more improper control and coercion then the efficient response is to convince the public to put strict limits on the size and scope of government: Yes, libraries are a good thing, but we know that inevitably the government will use them to control our reading habits so they’re more risk than good. However, if it is the public that tends toward improper control and coercion then we can still implement good government policy in those areas where the public is firmly convinced against coercion: Libraries are a good thing and the people are strongly against censorship, so we can keep them public.

            You may be right on the former, but I really doubt that the general public has become more coercive over time (at least in the US).Report

          • Avatar Brandon Berg says:

            You’re right. It’s not simply that the government likes control; in many cases, the voters like controlling the lives of the poor as well. But this is hardly an endorsement.

            What’s wrong with this? Paternalism is inappropriate for most of the population, but the poor are for the most part a self-selected sample. They’re poor because they’ve done a bad job of managing their own lives. We tried letting them call the shots and it didn’t work. It’s not clear that paternalism is a worse solution than handing them money with no strings attached.Report

            • Avatar Jeff says:

              This?  Is why I hate libertarians.  The “Just World Fallacy” is their reason for living.Report

              • Avatar Jaybird says:

                Imagine how much better the world would be if you could remove the agency of the poor and have them follow the decisions you’d make on their behalf.Report

              • Avatar Brandon Berg says:

                This? This is why I hate leftists. The “Inexplicable Poverty Fallacy.” It can happen to anyone! At any time! For no reason whatsoever!

                In the first world, poverty is generally attributable to personal fish-ups. There are exceptions, of course—severe disabilities, mostly—but they are the exception, rather than the rule. Any sane approach to dealing with first-world poverty needs to account for the fact that the poor as a rule have a track record of making bad decisions. And you’re not doing them any favors by playing dumb.Report

              • Avatar Jesse Ewiak says:

                Yes, poor people make horrible decisions like being born to other poor people and rich people make great decisions like being born to other well-off people.Report

              • Avatar Roger says:

                Jeff thanks for the phrase,

                I was previously unaware of the Just World Fallacy.

                It seems to take a good thing — the value of personal responsibility — and shows how if taken to an extreme it can become a vice. Aristotle would probably agree.

                The opposite of course is to start with the value of compassion and show that if we take it too far we have an ethos of dependence or victimization.

                I’ll side with Aristotle on this one. Personal responsibility and compassion.Report

            • Avatar Patrick Cahalan says:

              Citations needed.Report

              • Avatar Stillwater says:

                Wtf, Patrick. That’s pretty demanding. I mean, how could you not be persuaded by the fact that we tried letting the poor call their own shots and that it didn’t work? What more do you need?

                 Report

              • Avatar Brandon Berg says:

                In the US, you literally can’t be poor if you’re working full time and have no dependents. The minimum wage puts you at around 130% of the poverty line. It’s also really easy to get a job that pays more than minimum wage. Not right now, perhaps, but in virtually any circumstances other than a once-in-a-lifetime recession.

                To be poor, you either have to be unable to hold down a job, or to have more dependents than your income can support. Acting in a way that results in you being unable to hold down a job: Bad decision. Having children you can’t support: Bad decision. QED.Report

              • Avatar Roger says:

                Adding on to Brandon’s comment.

                The recipe for being middle class can be written on a napkin, and absent really bad luck is a fairly fool proof recipe.

                The recipe includes first and foremost personal responsibility. Compassion is required for those that do get bad luck. For those refusing to follow the recipe, we should use a stern reproach, followed by tough love.Report

              • Avatar Roger says:

                This assumes of course that they WANT to be middle class. If they want to stay home and play video games all day I am good with that too.Report

              • Avatar Liberty60 says:

                I only respond to Brandon’s comment to highlight it, not counter it.

                This-  the simplistic viewpoint of the world- is what causes liberals lke me to accuse libertarians and their fellow travelers of being naive and callow.

                It reads like the viewpoint of someone who has never experienced life, who peers out at the world from the priviledged vantage point of riding atop the shoulders of parents. Who has never experienced failure, tragedy, or misfortune.

                Yes, Brandon, you are correct. If people who earn minimum wage simply agreed to be responsible and live their lives without family or children, they would be just fine.

                They thank you for the gentle lesson and guidance.Report

              • Avatar James Hanley says:

                the simplistic viewpoint of the world-

                Oddly, libertarians tend to think liberals have a simplistic view of the world, too.

                Could it be that neither side is willing to consider the actual depth and complexity of the other side’s world view?  Or can we say with certainty that liberals are sophisticated, libertarians simplistic (or vice versa)?Report

              • Avatar Brandon Berg says:

                I only respond to Brandon’s comment to highlight it, not counter it.

                From each according to his ability, I guess.Report

              • Avatar Liberty60 says:

                Libertarians are, to a man, some of the most well educated and erudite people I have ever met.

                Even on these pages, I am hard pressed even to catch the literary and poliltical references that are made, much less fully grasp them.

                But the fact that all this intellectual firepower is being pressed into service for a defense of the status quo- the Just World Fallacy-which can only be made by willful ignorance of how the status quo came about.

                Everyone here- you, me, the commenters, the frontpagers- all of us were born into a life of priviledge and unexamined comfort and access. No, I don’t care how bootstrappy you think you are; you have enjoyed the benefit of generations that came before and erected a structure of laws and institutions and organizations that have as their central goal the protection of that priviledge. Everything in the world around us- the streets, highways, suburbs and cities was created by and for those who held power, nearly always for their own benefit.

                In our world, failure is buffered by a safety net created by those previous generations that always acts to shave the dice and give us the edge;  Wardsmith beat on a cop and took his gun, and instead of being shot 120 times, was given a stern scolding and a free ride home. And maybe an ice cream cone, but I didn’t read that far.

                The flaunting of erudition, the signalling of class priviledge, combined with the underlying tone of savage indifference to the frailty of human nature is what causes me to use the word “callow”.

                I can’t counter any of this with a cleverly worded comment; I would have done better trying to explain the life of peasants to the court of Louis IV, or life of a sharecropper to Scarlet O’Hara.

                If you sit atop the social pyramid and shrug off the pain and suffering of the bottom 99% with a smirking QED, then there just aren’t any words to counter that; your life experience has no point of reference that can be used to provide a common foothold for logic.

                 Report

              • Avatar Jaybird says:

                defense of the status quo

                Is *THAT* how you see Libertarianism? I mean, I can see making accusations of Libertarians wanting to “turn back the clock” or “make things worse” but defending the status quo? I suppose an argument like “doing nothing at all would not be as bad as what you’re proposing” might seem like a defense of the status quo but you really think that Libertarians want to stay where we are?

                life of priviledge and unexamined comfort and access

                Oh, yes. *THAT*. It certainly cannot be the case that they examined things and came to the conclusion that certain things were made worse through a technocrat’s meddling. Oh, no. They have to oppose the great and glorious Tomorrow being proposed by the Progressives… by, of course, defending the status quo.

                Out of curiosity, if a handful of Libertarians gave a list of things that they’d change (and, I assure you, every single Libertarian I know has a *LONG* list), what are the odds that you’d say something like “doing nothing at all would not be as bad as what you’re proposing” for, oh, let’s say a third of their list?

                Would you object to being painted as a defender of the status quo, you with your unexamined life, your white male heterosexual privilege, and your admitted lack of taking the time to educate yourself now that you’re no longer being graded for it? Or would you say that this, while somewhat accurate on its face, betrays a deep misunderstanding of the deeper dynamics of your life (including, of course, how much you *CARE*)?Report

              • Avatar Roger says:

                Liberty,

                I really do disagree with your take on our values. I see those in the status quo as one of the great threats to future prosperity. I believe the curse of humanity has been exploitation and incumbents (the status quo) resisting progress and freedom.

                I totally 100% endorse your appreciation of building upon the cultural accumulation bequeathed us by our predecessors. I feel obliged to similarly contribute to others.

                I want worldwide prosperity, two zero carbon footprint cars in every driveway, and a free range chicken in every pot.

                I just do it by stressing liberty, personal responsibility and positive sum interactions. I do not see the path as forced equality of outcome, top down management of the economy or win lose class warfare and tribalism.

                But then again, I could be wrong.Report

              • Avatar BlaiseP says:

                Nah.  Libertarians aren’t elitists.  Far from it, they’re mostly interested in clearing away the rubble surrounding the core issues of our time.   They are clever people, as you say.   They’ve got a few fallacies which are quite easily corrected, if only they’d start living in the modern world.

                Here’s what they’ve got right, and it’s a complaint once made by Liberals, too:  government has become far too intrusive.   Our rights as individuals are compromised, not on an individual basis, but as a collective.   In other words, Da Gummint isn’t after you, personally; you just happen to fit a pattern and come into focus on that basis.  If we are ever to regain control of the government, it will begin when our rights as individuals are again respected.  Only the Libertarians are making that point.   The Liberals used to talk like that but to our shame, we no longer do.   Far too often, Liberals make excuses for government.  As for Conservatives, well, they talk much trash about Big Gummint but when they’re in power, they only enlarge its power to intrude.

                If the Libertarians have a core fallacy, they don’t understand the power of the collective to support the rights of the individual.   As the previous paragraph sets forth, our rights are compromised on a collective basis and can only be regained on that basis.   Libertarians hate trade unions, conflating them with Communism, believing them a great impediment to free markets in labour.   They are wrong.   The union arose precisely because individual rights must be gained and maintained through collective efforts.

                Their secondary fallacy is pretty obvious:  they don’t understand markets.   I really should write something about this, based on what Hayek had to say about it, updated for modern times.Report

              • Avatar Jaybird says:

                (For the record, I like trade unions. I hate public sector unions.)Report

              • Avatar BlaiseP says:

                Ecch… I’m against the closed union.   The USA would benefit hugely from open unions, such at they have in Germany.   In Germany, closed unions are illegal.Report

              • Avatar Will H. says:

                Open shops don’t work well in our framework.
                Granted, the only experience I have with them is in right to work states.

                The structure of the union itself makes a lot more difference.
                Shop unions are structured to where you get a job at the company and then join the union.
                A trade union, you apply to the apprenticeship program, and they’ll send you out to a job.
                A lot of what I deal with is this sort of thing. If you need a guy that’s certified in B31.3, one phone call and you’ve got him.
                Our contracts are with a trade group, usually one with the word ‘mechanical’ or ‘engineering’ in there somewhere.
                Think if the UAW had one contract for all of the Big 3. Compensation would be the same at each company for each task.
                For the worker, if you get fed up at the one company, you get on the bench and get a referral to another company. Large companies and small ones are all on the same foot.
                But the big difference between a shop union and a trade union is the apprenticeship program and maintain a certification program.
                For the members of the trade organization, it takes the guesswork out of hiring. The hall is the HR dept.Report

              • Avatar Liberty60 says:

                Jaybird-

                I have never read a single proposal anywhere from a libertarian, that would have the effect of threatening the power of the 1%.

                Even the most radical thought experiments would have only the effect of destroying what little restraint on power and priviledge the 1% have currently.The status quo would change certainly, but the existing power structure would remain as it is.

                As for those who examine the heritage of power and priviledge and believe that meddling technocrats made it worse- if someone wants to mount an argument that:

                The government stealing an entire continent from the native landholders and giving it away to millions of homesteaders didn’t benefit them and their descendents;

                That taxpayer funded roads, ports, bridges, highways airports, dams, sewers, aqueducts and storm drain canals worked to harm, rather than help the fortunes of your ancestors;

                That had Hoover been re-elected the Depression would have been shorter and milder;

                That the GI Bill harmed rather than helped your parents and grandparents;

                That the VA and SBA loan programs worked to impoverish your parents;

                That the free college education that was the norm in the 1950s and 60s was a detriment to your family;

                If you want to mount a counterfactual history to show us all that all these things were harmful meddling, and that America would be a richer more just place instead, well go right ahead.

                But until then, when I examine history, I see that you- yes, you personally and all of us reading this- are the receipient of hundreds of years of government assistance, subsidies, and rentseeking.

                Not simply “good decisions.”Report

              • Avatar Jaybird says:

                What the hell? We talk about lowering barriers of entry for business, we talk about ending the drug war, we talk about increasing (if not enshrining) a right to privacy, and, of course, we talk about limiting the reach of The State (which, we argue, has been captured by the 1%).

                I daresay that any/all of these things would result in less power on the part of the 1%.

                For what it’s worth, I don’t know that I can effectively talk about things that the government did before I was born but I don’t know that the solution to the wrongs that were done would involve giving the goverment more power. Given that *MY* take on that won’t be followed by the government (seriously! It won’t!) over the next decade, maybe you can tell me how giving the government more power will help. As for the good that was done, I suppose I could ask how good of a job we’re doing at replicating the good that was done before I was born with our modern-day programs and ask what is the difference. I mean, if the government was not able to create a power plant on the scale of Hoover Dam with the last round of work programs, why wasn’t it able to?

                What’s the difference between now and then?

                I submit for your approval: if we had a government that was as “small” as it was then, we’d be able to do what we did then.Report

              • Avatar Mike Schilling says:

                 I mean, if the government was not able to create a power plant on the scale of Hoover Dam with the last round of work programs, why wasn’t it able to?

                From Wiki: (http://en.wikipedia.org/wiki/Hoover_Dam#Construction_deaths)

                There were 112 deaths associated with the construction of the dam. […] Not included in the official fatalities number were deaths that were recorded as pneumonia. Workers alleged that this diagnosis was a cover for death from carbon monoxide poisoning, brought on by the use of gasoline-fueled vehicles in the diversion tunnels, and a classification used by Six Companies to avoid paying compensation claims.[70] The site’s diversion tunnels frequently reached 140 °F (60 °C), enveloped in thick plumes of vehicle exhaust gases

                So, I guess part of the answer is OSHA.Report

              • Avatar Jaybird says:

                Great, let’s take OSHA into account. Set it up and get ready to pay associated costs. Was there a project on the scale of the Hoover Dam (adjusted for OSHA)?

                Surely there must be *SOMETHING* that could be done on that scale today.

                If there isn’t… why isn’t there?

                OSHA?Report

              • Avatar BlaiseP says:

                @Will:   Our framework could be easily and promptly changed.   The “right to work” is a bit of Newspeak which gives the employer the right to single out an individual and keep him from operating in concert with his fellow workers.

                The rest of my point has been blithely ignored. Only through the collective can individuals protect themselves.

                Germany makes it work.   They’re prospering, we’re foundering.   Our unions emerged from an adversarial relationship between owners and workers.   It doesn’t have to be that way.   Unions could, as you point out, be the basis for the creation of skilled workers.   We lost our unions and exported our skilled labour jobs as a direct result.   End of story.   Everyone knows there is no other explanation.

                While Libertarians cling to this forlorn hope of some world of unfettered capitalism curing society’s problems, they are only advocating a return to the base conditions which gave rise to Communism in the first place.   That’s exactly where it’s going.  It’s inevitable.  They just don’t see it.  In their zeal to protect the rights of the individual, they have forgotten how the individual ever got any power in the world, by force of numbers.   The Libertarians loudly preach the dangers of following the Road to Serfdom, completely blind to the history of the Road from Serfdom.

                 Report

              • Avatar Stillwater says:

                If there isn’t… why isn’t there?

                Really, JB? Is that the best you can do?Report

              • Avatar Stillwater says:

                Between period shout out to Lib60. I didn’t mention it before, but really good comment. Like, really good.

                It may be we live in a post government world like the Libertarianish say (I don’t think so) but it’s important to remember how we got to this wonderful point in history. Lovethisworld!Report

              • Avatar Jaybird says:

                Really, JB? Is that the best you can do?

                Dude, I did a lot in that comment. But to answer your question: I’m quite happy to argue that if we can’t do what we used to do it’s because we’re different than we used to be.Report

              • Avatar Stillwater says:

                Dude, I did a lot in that comment.

                I know. I felt kinda bad once I hit submit. I took the the easy way out (deep breath) cuz I didn’t want to actually argue against the point implied by the question cuz I knew you knew the argument was there. (deep inhale)Report

              • Avatar Jaybird says:

                Are you coming to Vegas? You should come to Vegas.Report

              • Avatar Will H. says:

                @Blaise:
                There’s a bit more to it than that; or so I’ve picked up from listening to the oldtimers (which frankly, I love to do, because I understand that if those stories are not passed on, they will soon be lost).
                To set the base, the non-marine work is currently about 50% unionized. We comprise about 3% of the total of the AFL-CIO membership. It’s projected that the industry will grow by 26% over the next ten years. And from looking at the median pay for the industry, I think that’s pathetic. I can make that much in 6 months or less. The non-union rates are about 2/3 of union wages, and they typically have no benefits whatsoever. They have to be in a supervisory capacity to have benefits.
                As it was told to me:
                We used to have a lot more of the market share, and especially in the South. Those Southern boys screwed things up for themselves (direct quote) by not taking care of their contractors. They would sit inside and play cards and such and charge it to the contractor; three men to do the work of one, and things like that. They were just lazy, and they took advantage. Now they go up North to work.

                Manufacturing is a different story. They’ll never be able to outsource my job, and if they decide to go with someone less qualified, it’s going to end up costing them more. I know I’m there to take care of my contractor. I’m not a company man, and I’m not going to go around acting like I am. But I take care of my contractor.

                Manufacturing suffered some setbacks with automation. Around the same time, during the Reagan years (which I, being from a little oilfield town flooded with Yankees from the Rust Belt, remember as being terrible), interest rates were high, and discouraged project financing, while the barriers for multi-nationals were breaking down. It was a triple-whammy. I don’t think we’ll ever get it back.
                From the small part of the tail end of that that I see, where the unions really cut their own throats is in accepting lower wages for new hires, and allowing contract employees. If the company can hire people from the temp service for 89 days at a stretch and avoid paying the benefits, they will.
                The dynamic with lower wages takes a bit longer, but the doom is just as sure. It’s a matter of time until those new hires have enough of a voting bloc within the local to have some pull. At that time, it’s over for everyone.
                The only solution is for everyone in the local to take a pay cut. We did that in my home local in the late 90’s. It took a few years to make it up, but then we went way past that fairly quick. Everyone has to be in it together.
                In fact, the only real strike from my union that went ahead without intervention was due to the fact that the contractor’s association was trying to split up the pay. That was a couple of years ago. Once they needed the skilled labor, they agreed to the contract. It took about three months.

                I really think the manufacturing industries would be better off negotiating with a trade organization rather than the companies one at a time. It would strengthen their halls, and even out the industry. Some people would have to take a cut, sure; but it’s either that or a buy-out down the line.

                They can bring things back if they want to. They’re going to need to re-think the way they’re doing business. The ossified power structures in place don’t want to give up their King of the Mountain status.Report

              • Avatar Will H. says:

                @Jaybird:
                Before OSHA, they had insurance. The insurance adjusters would come out and calculate how many men would die in order to get the project up. Then they’d run the numbers to figure out how much it would cost to pay off their families.
                That’s the way business was done.
                We decided it was better not to kill people. No humanitarian thing; it just takes too long to train skilled labor. So they set up safety offices, and populated them with safety men.
                The purpose of OSHA is to preserve skilled labor. It’s not some Kumbaya hand-holding humanitarian mission.Report

              • Avatar Mike Schilling says:

                Let’s keep going with that statistic.  Men keep going back into that poison hell, day after day, for what I’m guessing aren’t generous wages.  They have to, to keep their jobs, because for each one who might object, there are three or four ready to take their place.  This is 1931; it’s as bad as things have ever gotten here, private charities are overwhelmed, and if you can’t find work, you and your family are shit out of luck.

                People just aren’t as desperate these days.  There’s unemployment, and food stamps, and various other government programs, and people won’t broil themselves in monoxide for a paycheck.  I have a hard time saying that’s a bad thing.Report

              • Avatar Will H. says:

                Are you still going on about the Hoover Dam?
                Look, this is a very unlikely thing for me to say, and don’t ever tell anybody you heard this from me, but sometimes you shouldn’t be such a cynic.
                The fact of the matter is that they didn’t know all that well at that time how much ventilation was needed.
                I’m fairly certain that Frank Lloyd Wright never built a chimney that worked properly.
                They still can’t calculate all of the primary variables for proper venting– because they change all the time, even within the same vent shaft.
                That’s why we use air monitors these days.
                Confined space procedures, permitting requirements, etc.Report

              • Avatar Roger says:

                Blaise,

                Your comments on the power of the collective actually seems almost right, though that is not how I would phrase it. Our social fabric is built up out of a shared framework and world view. Common mores, traditions and expectations that build into credible protocols, institutions and laws. Libertarians talk a lot about the individual, but the creative potential comes from how we cooperate together to build something beyond the individual.

                I believe in the power of constructive cooperation and constructive (positive sum) competition. I guess I believe in the power of us.

                I’d also like to hear more on your ideas of the road from serfdom.Report

              • Avatar BlaiseP says:

                @Roger

                Thanks for your noting the social fabric is built up out of a shared framework and world view,  common mores, and especially credibility.    I’ll sit down to write something about the Road From Serfdom.   Insofar as we play Beggar Thy Neighbour, we shall all be beggars and not neighbours.Report

              • Avatar Roger says:

                Adding on to Jaybird’s retort to Liberty’s challenges….

                Most libertarians engaged in this forum see value in education, infrastructure, law enforcement, homesteading rights and so forth. In many cases these can be provided by the government. We want them provided efficiently, and will often argue that they could be provided more so with additional competition. Government solutions are not intrinsically bad. Government can be good. Excessive government, inefficient government, coercive, busy bodyish government is bad.

                And yes, we would have gotten out of the depression much faster with less clumsy government interference.Report

              • Avatar Roger says:

                Amen brother on the beggar thy neighbor line! I feel exactly the same way and just am trying to solve it a different way. I am open to suggestions though.Report

              • Avatar BlaiseP says:

                @Roger:  I am sad to report there really is no other way.   Until each individual reaches the conclusion that rights are not held individually, but in common, we will all stand around like so many frightened deer while the predators single one of us out and pull him or her down.

                Yesterday as I was driving up Route K, I saw a band of magpies mobbing a hawk, driving the hawk away from the tree line, over an unplowed cornfield.  We shall either hang together or we shall all hang separately.   Your rights are also my rights.   To preserve my own rights I must also work to preserve yours, not from some do-gooder socialist impulse, but from the certain knowledge if you are singled out, I will be next.

                It’s right there where the boiler of the whole wretched Libertarian ethos explodes.   In their fatuous wish to avoid the imperative of the collective, they are deer and not magpies.Report

              • Avatar Roger says:

                But that is how I address the issue as well. To preserve our rights, we must preserve yours. I agree 100%.

                In Rawlsian terms, we can choose a society where we all have equal rules and nobody is allowed to trespass against another. Not the 1%, not the majority, not the criminal, and not the government itself.

                The tougher question is what are the details on the rules? And, since everyone probably won’t agree on identical rules, how do we resolve the conflicts in values without resorting to trespassing against other in order to get everyone to play by the rules? I suspect we may differ in how we address the latter tough questions.Report

              • Avatar BlaiseP says:

                @Roger:  quit worrying about a problem we ain’t got yet.   The Libertarians remind me a bit of Dennis the Peasant in Monty Python, them and their anarcho-syndicalism.   They’re still bloody peasants and will go being peasants until they pull their heads out of their asses and see themselves as a force in the world.   And yes, that means they’ll have to institute some leadership.

                What’s the big deal here?Report

              • Avatar Liberty60 says:

                Libertarians love the right to privacy; But do they love it as much as the right of property and contract?

                For example, if a landlord wanted to install a videocamera in the bedrooms and bathrooms of his rental units (to prevent vandalism of course), would libertarians side with the landlord or the tenant?

                I bet I know the answer.

                 Report

              • Avatar Jaybird says:

                Um, the tenant.

                If you’d like to talk about damage deposits, however, we could.

                Dude, it feels like you’re not even trying.Report

              • Avatar Roger says:

                Blaise,

                Because if you think the answer is “Let’s all cooperate.” you are substituting an Easy question for the real one. The real question is “How do we cooperate.”

                People will kill each other over that one… All in the spirit of cooperation, of course.Report

              • Avatar BlaiseP says:

                C’mon, cooperation isn’t the issue, cooperation without a cause is la-dee-da socialism.  People only cooperate when they share a common grievance.   You can be a magpie or you can be a deer.   Your choice.   It’s just that simple.

                You can furrow your brow, I can furrow mine, we can both bemoan the sorry state of privacy and the encroachments on our rights — until we do something, that’s just la-dee-da Libertarianism.   The Libertarian is the most useless, whiny git in the political universe.  For all his cleverness, he has no idea how to fight and win, sitting there sulking in his tent like Achilles, armed with the best argument of all, the rights of the individual but too goddamn silly to understand how such rights are won and kept.Report

              • Avatar Mike Schilling says:

                For example, if a landlord wanted to install a videocamera in the bedrooms and bathrooms of his rental units (to prevent vandalism of course), would libertarians side with the landlord or the tenant?

                @JB: The tenant.

                That is, you’d favor making this illegal, rather than allowing the individual tenant to determine whether the lower rent/security deposit is worth the loss of privacy? I think Bryan Caplan  would disagree, at least if the tenant were female.Report

              • Avatar Brandon Berg says:

                Barring language in the rental agreement explicitly allowing this, a reasonable default rule is that making these kinds of modifications should be considered a breach of contract by the landlord due to the fact that this is not something one would reasonably expect in an apartment. The tenant would be entitled to collect damages and/or to get a court order preventing the installation. Assuming that the tenant was notified in advance, of course—doing it secretly would probably fall afoul of some criminal voyeurism laws, and rightly so.

                On the other hand, if the landlord wanted to make accepting the cameras a condition of leasing the apartment, at the time of signing the initial release or renewing, then that would be within his rights, since it’s his property, and he’s under no obligation to rent it all. I’m not actually aware of any laws forbidding this now—though I could be wrong—I think it’s just something that people don’t do, because the value to the landlord of having the cameras is less than what most tenants would require in terms of rent reduction to accept them.

                I think Bryan Caplan would disagree, at least if the tenant were female.

                There’s no evidence that Bryan Caplan favors legal discrimination between men and women. This game of yours of substituting snark and innuendo for intelligent commentary is getting old. If I were feeling more charitable, I’d say this was beneath you, but frankly, I doubt it.Report

              • Avatar Brandon Berg says:

                Q: What do a libertarian landlord and a left-wing tenant have in common?

                A: A strong sense of entitlement to the landlord’s property.Report

              • Avatar Mike Schilling says:

                a reasonable default rule is that making these kinds of modifications should be considered a breach of contract by the landlord due to the fact that this is not something one would reasonably expect in an apartment.

                What if the tenant is leasing month-to-month, rather than their being a lease (assuming sufficient notice is given)?

                Also, is it OK for the landlord to require security cameras only if the tenant is black?  What about only if the tenant is female and between the ages of 18 and 30?

                And no, the fact that Caplan defends a form of enslavement that was not that long ago universal among women and has never been applied to men says nothing about his bona fides as a lover of universal liberty. Of course not.Report

              • Avatar Jason Kuznicki says:

                I have never read a single proposal anywhere from a libertarian, that would have the effect of threatening the power of the 1%.

                • Shorten patent and copyright terms. Or eliminate them.
                • Term limits for elected officials.
                • Loser-pays rule for civil litigation.
                • Professional licensure reform, making it easier for new entrants and harder for elite families to control entry.

                Now you’ve read four. All of them would work directly against the interests of the wealthiest, with concentrated losses to them and thinly distributed benefits to most others. All of them are very popular in the libertarian movement. None of them is exceptionally radical or untested.

                That said, the point of the libertarian movement isn’t to attack people based on wealth.  We tend to find that approach repugnant, and we rarely sell our policy prescriptions based on how bad they will be for rich people.  Even if some of them certainly would be.Report

      • Avatar Brandon Berg says:

        This is kind of tangential, but is it actually true that homeowners pay less than renters, assuming dwellings of equal value? Someone who owns his own home can deduct his mortgage interest, but a landlord can deduct his mortgage interest as a business expense—on top of depreciation of the principal, I believe—which results in lower rents. If anything, it seems like the tax code slightly favors renting, due to depreciation.

        I could be wrong about this, since it seems to be pretty much universally agreed that the mortgage interest deduction is a distortion favoring ownership, but if I am, I don’t know why.Report

        • Avatar Kimmi says:

          Brandon,

          1) You’ve got to understand that rents go up regardless, and that in a rising housing market, renters are doubly screwed.

          2) in a deflating housing market, renters make out a bit more…

          3) Yes, about 2% less on average, and a whole hell of a lot less where I live (20% vacancy rate. who rents??)

          Mortgage rent deduction only helps people with expensive houses (otherwise, you’re better off with standard deductible).

          The landlord still needs to make a profit.Report

          • Avatar Kimmi says:

            but again, what are you comparing things to? a 8% standard on the market might make it a better deal to downsize and push money towards that, rather than whatever’s the inflation on houses.Report

        • Avatar Will H. says:

          Not really the way it works on a mechanical basis.
          The mortgage interest deduction is on schedule A. You have to itemize to claim it, which means you’re doing so in place of the standard deduction.
          Mortgage interest is typically front-loaded; meaning you pay more interest in the early years as compared to the later years. So the amount of interest available for deduction will be significantly less in the 12th year of the loan as compared to the first.Report

        • Avatar Brandon Berg says:

          Okay, I think I see what I got wrong here. Allowing the landlord to deduct mortgage interest and depreciate the principal is needed to prevent double taxation. The tenants still pay the mortgage payment and then some (profit) with no deduction, but since they’re already taxed on that income, only the “and then some,” which is the landlord’s value added, should be taxed. So the landlord’s deductions don’t create a distortion in favor of renting, and the personal mortgage interest deduction does create a distortion in favor of buying.

           Report

          • Avatar Will H. says:

            I think I got lost in that somewhere.
            I was looking at buying an apartment building, three units, and what it came down to is that the note would be paid through rents, and I would end up paying the utilities for the place. Less expensive in the long run, but the additional income from rental properties is ocnsumed fairly quickly on the small scale.
            Large scale is a different matter.
            I know two twin brothers that own something like 14 rental properties between them, and the demand on time is extraordinary. If you think of it as anything else other than a safe place to sink your money, you’re buying into a line. The big part of making money on the place is when you sell.Report

  2. Avatar clawback says:

    Not everyone shares “our intuitions” distinguishing tax subsidies from direct subsidies.  Many of us not of the right correctly view the two, even intuitively, as effectively the same.Report

    • Avatar Jason Kuznicki says:

      I’m curious, though, what you make of the public choice arguments suggesting that the two will not remain the same forever.  Political decisions do not happen in a vacuum, but in a web of conflicting interests.Report

      • Avatar clawback says:

        My point was that it’s hard to work up any interest in the question unless one accepts premises about “kleptomaniacal government” and “governments [that] like control”.  I’ll grant you that under such premises the distinction between tax and direct subsidies might start to become significant, though I don’t really know for sure.Report

  3. Avatar Matty says:

    I’m curious exactly what you count as a tax deduction looking from the viewpoint of small business.

    Lets say a shop sells $1000 worth of stock and is taxed at 10% of that but they bought from the wholesaler at $900 so that $100 tax is taking 100% of the money they actually have. The only way to avoid this is to say that they can offset the purchase of stock against their tax liability, which looks like a kind of deduction to me.

    Obviously you mean something different by tax deductions so I’d be grateful if you could point me at a definition so I can follow things.Report

    • Avatar DensityDuck says:

      That’s not how capital-gains taxation works.Report

      • Avatar Kazzy says:

        I think he means “stock” in terms of “inventory”, not investment stock.Report

        • Avatar Matty says:

          Yes sorry if that wasn’t clear, I meant goods for sale in the shop not part ownership in another business.

           Report

          • Avatar DensityDuck says:

            Then that’s not how taxation on business activity works, either.  If you plan to resell the goods or use them as raw materials for later work then you don’t have to pay sales tax on them.  You pay sales tax when the good is finally sold to the end user.  (There are various ways by which the book-keeping is accomplished, your state/city generally has its own way of handling it.)Report

            • Avatar Matty says:

              OK first I know squat about the US tax system so I’m going to switch to using my own British experience as an example instead, the argument is about understanding general terms so I hope it still works. That said I wasn’t actually thinking about sales taxes but taxes on income to the business.

              Here is how my business operates in an example month (not real figures, chosen to make the argument clearer)

              1. Money paid to me £2000 aka gross income

              2. Cost to me of earning that money £1600

              3. Net profit £400

              My income tax is 20% so if I am allowed to deduct business costs I would pay £80 in tax.

              If you say no deductions you should be taxed on what you are paid my tax would be £400. That leaves £0 for my personal income and would make it impossible to pay household bills, eat etc.

              I see from Patrick Cahalans comment below that California also taxes business owners on profit rather than takings so I’m hopeful the broad point is transferable.

               Report

    • Avatar Brandon Berg says:

      He’s talking about tax deductions for personal expenses. As far as I know, there’s virtually unanimous support for tax deductions for business expenses.

      That said, it seems to me that allowing deduction of business expenses but not similar personal expenses creates distortions against doing stuff yourself. For example, if you buy landscaping equipment for personal use, you can’t deduct those. But the owner of a landscaping service can, and this creates a distortion in favor of hiring a landscaping service instead of doing it yourself.Report

      • Avatar Matty says:

        Heh, I once met a guy who owned a landscaping business and actually tried to bill himself for doing his own garden to put the cost of some plants against tax. Never did hear if he got away with it though.Report

      • Avatar DensityDuck says:

        “If you buy landscaping equipment for personal use, you can’t deduct those. But the owner of a landscaping service can, and this creates a distortion in favor of hiring a landscaping service instead of doing it yourself.”

        Except that’s not a bug, it’s a feature.  The intent is to promote business activity, and if you do everything for yourself then that isn’t business activity.Report

        • Avatar Fnord says:

          No, it’s not.

          Household production DOES count. If your accounting system doesn’t count it, that’s a bug, not a feature. And the idea that each individual is best positioned to decide whether it’s more efficient to hire a company or do the work themselves is as much a part of the free market as the idea that an individual is best positioned to decide which company to hire.

           Report

          • Avatar DensityDuck says:

            I didn’t say that it maximized the amount of wealth present in the system.  I said that the intent was to promote activity by businesses; which, presumably, creates more employment and therefore more widely distributes the wealth present in the system.Report

            • Avatar Fnord says:

              Basically, the “government should break windows to provide employment for glassmakers” argument.Report

              • Avatar Brandon Berg says:

                It’s not a fallacy if the glassmaking industry donated money to your campaign fund!Report

              • Avatar DensityDuck says:

                *sigh* if you honestly insist that one guy with 1.1x money is better than ten guys with 0.1x money each, then I guess there’s really no discussing anything with you.  I do wonder what you think of Thomas Jefferson, though.  (If you’re at all consistent you’ll think he was a dangerous idiot.)Report

              • Avatar Fnord says:

                I don’t see that subsidizing business at the expense of home production is a good way to provide that. If anything, it seems that that subsidy would go disproportionately to the wealthy, who are more likely to hire companies to do the cleaning, landscaping, etc, of their homes that many people do themselves.Report

              • Avatar Fnord says:

                And, similarly, the wealthy are also better able to hide what are effectively personal expenses as business expenses.Report

              • Nob Akimoto Nob Akimoto says:

                Yeah, it’s always interesting how marginal tax rates influence non-monetary compensation for executives. Particularly of SMEs.Report

    • Avatar Patrick Cahalan says:

      In California, you get a reseller’s tax ID.  When you buy inventory, or you buy parts, you buy them with exempted sales tax.

      You then resell them at your markup, or you assemble the parts and sell the finished product, or whatever.  Sales tax is charged on the end consumer.

      Your actual business tax rate is based on your profit, which is the sale price of everything you sold minus all your allowable costs of goods sold and eligible business expenses.  Lots of small business owners actually operating at a net loss, for taxable purposes, for several years.Report

      • Avatar Matty says:

        Your actual business tax rate is based on your profit, which is the sale price of everything you sold minus all your allowable costs of goods sold and eligible business expenses.

        This is what I’m trying to get my head around, eligible business expenses are deducted from total income to calculate tax liability. I want to find the definition of a tax deduction that doesn’t include this.Report

        • Avatar Patrick Cahalan says:

          That’s not a tax deduction. It’s accounting for profit.

          Unless you want to talk about changing the tax rate from being on gross receipts instead of net profit, but that would be a terrible idea.Report

          • Avatar Matty says:

            I specifically don’t want taxes on gross receipts rather than profits. It is simply that I seem to hear people talking about how unfair it is that business gets tax breaks for buying equipment and I worry that they are actually arguing that what you call ‘accounting for profit’ is unfair.Report

            • Avatar Will H. says:

              As with most everything else, there are two sides to this.
              What PatrickC says is true; this is the way that a business holding an inventory accounts for that.
              To bring us closer to where I would like to go with this, with a sole proprietorship, the beginning inventory and end of year inventory are both declared on schedule C. Effectively, this eliminates the need to declare each loss through theft of damage individually on form 4684.
              The business deduction specifies 100% business use.
              Consider each individual taxpayer as a business, achieving earnings by engaging in some manner of business.
              Now, suppose the employer requires uniforms. The expense is deductible for the taxpayer. The same with tools, union dues, etc.
              People like to remember that they pay taxes, while they like to forget that they do so as a matter of engaging in some manner of business.

              Now, for me personally, I do fairly well with the mileage deduction. It’s part of my job.
              Were that deduction removed, then it is highly likely that the employer would provide some measure of compensation (and not necessarily through wages, but more likely by increasing the per diem), even though it may not be right away.
              In that scenario, I would pay significantly more in taxes, because I had received compensation through the employer.
              Granted, we could reduce overall rates like that.
              But it’s either one system or the other, or some mingling of the two.Report

              • Avatar DensityDuck says:

                “Were [the mileage] deduction removed, then it is highly likely that the employer would provide some measure of compensation…In that scenario, I would pay significantly more in taxes, because I had received compensation through the employer.”

                Incidentally, this is why CEO salaries have “skyrocketed” recently.  Not because they’re actually getting more actual money, but because lots of things that used to be “perks” are now counted as income.  On the one hand, their “reported income” goes way up; on the other hand, now the government can tax it.Report

            • Avatar Matty says:

              And to add to my confusion

              Nearly all jurisdictions that tax business income allow tax deductions for expenses incurred in trading or carrying on the trade or business

              Now granted wikipedia can be flat out wrong but it seems that I am at the very least not alone in my error.Report

              • Avatar Will H. says:

                It’s the same thing.
                The brokerage fees are deductible from the trade, because it’s not profit. If I sell 200 shares of XYZ at $25.63 per share, having bought in at $18.36, with $12 trading fees, that’s ((200 * 25.63) – 12) – ((200 * 18.36) + 7) = $1430 profit.
                Similarly, the trading account may pay interest at certain intervals, as well as charging interest. The amount of interest paid is taxable as income, and the amount paid is deductible as a business expense.
                The rules have recently changed to mandate a FIFO system to prevent the declaration of losses for tax purposes.Report

              • Avatar Matty says:

                Sorry still not following, apart from anything else I didn’t realise it meant specifically financial trading as opposed to any buying and selling but my point remains.

                Why is expenditure that I deduct from my income to calculate my tax liability not called a deduction? The wikipedia article clearly uses the term tax deduction to refer to “expenses incurred in trading or carrying on the trade or business”

                I think businesses should be allowed to deduct expenses against tax but do not understand how deducting something is not a deduction.

                Employee

                Income (wages)

                – money taken off for certain spending

                = tax liability

                But

                Sole trader

                Income (sales)

                – money taken off for certain spending

                = tax liability

                I can’t find anywhere but here where people are saying the first is a deduction but the second isn’t.

                 Report

  4. Avatar Mike Schilling says:

    Will left out a few key point of the right’s narrative:

    • Tax cuts always pay for themselves
    • Deficits caused by spending are Keynsianism.  Deficits caused by tax cuts are sound economics.
    • The few, legitimate functions of government include an ever-growing military (which, even if the wars in Afghanistan and Iraq were to end tomorrow, would still require more funding)

    Report

  5. Avatar Roger says:

    Jason,

    What am I missing? I agree with your various comments, but I think they are also different based upon how they affect incentives. Tax credits only benefit those that earn income, therefore they change the marginal value of producing value for others. Vouchers reward someone regardless of whether they produce value for others.

    In other words, I agree with you and would add that they also affect important incentives. Am I overlooking something?Report

    • Avatar Mo says:

      There are tax credits one can receive regardless of how much one pays in taxes. If the credit is larger than your liability, you’ll get a refund check. This is no different from a voucher except that it comes out as cash.Report

      • Avatar Jason Kuznicki says:

        This is no different from a voucher except that it comes out as cash.

        And I’m saying that this is a big difference, because cash can be spent anywhere. Not so with vouchers. The temptation to meddle with vouchers is present from the start and tends to enhance the power of the state at the expense of the recipient.Report

        • Avatar Mo says:

          There isn’t a difference because the tax credit is in exchange for you behaving in a certain way, while vochers are given before you commit an action. Either way, there’s meddling, the diference is when does the meddling begin.

          A tax credit for a hybrid car is no different than a voucher for a hybrid car. In the first case, you get cash, but only after you previously spent cash on a hybrid car. Same goes for the mortgage deduction. You only get it after you pay interest on a mortgage. If we sent everyone in the US a voucher that could only be used on mortgage interest, it would have the same practical effect.Report

          • Avatar Kolohe says:

            “Either way, there’s meddling, the diference is when does the meddling begin.”

            But, the psychologica difference no doubt has an effect on whether or not that activity is actually engaged in.  Or reimbursed later.

            Otherwise companies wouldn’t be so fond of offering rebates rather than just putting stuff on sale.Report

            • Avatar Mo says:

              The breakage argument cuts both ways. There’s a reason why companies are much fonder of store credit than they are of cash returns.Same goes for the reason why a stores push gift cards.Report

            • Avatar Rod Engelsman says:

              That and a lot of rebate are never claimed. People just forget. I just the other day found a $50 rebate form for the phone I bought a year ago.Report

          • Avatar Brandon Berg says:

            If we sent everyone in the US a voucher that could only be used on mortgage interest, it would have the same practical effect.

            No, not really. If the government sends me a mortgage interest voucher, I can take out a mortgage whose annual interest payment is equal to the value of the voucher and get the house (or money) interest-free. With the deduction, I have to pay (100 minus my marginal tax rate)% of the interest out of pocket.Report

        • Avatar Roger says:

          Jason,

          You still have not addressed my question. Sorry if I am slowing down the discussion, but it seems to me that tax deductions, regardless of what they are earned from, incentivize two things.

          Let me give an example. A tax credit vs voucher for a green car. The voucher only incentivizes one thing, getting a green car. The deduction only applies if one makes money. Thus it incentivizes making money aka productivity and buying a green car. This is not a subtle difference. It is a game changer.

          Deductions and vouchers are totally different.Report

          • Avatar Jason Kuznicki says:

            The existence of refundable credits means that in principle there’s not so much of a difference.

            You are definitely right, though.  Insofar as the system generally relies on nonrefundable credits, it only incentivizes part of the population, the part that is earning taxable income.Report

          • Avatar Mike Schilling says:

            Clearly, the capital gains rate needs to be raised back to that of regular income, so we can sufficiently motivate people with clever accountants too.Report

        • Avatar Simon K says:

          But in most cases – the only exception I can think of is EITC – to get the refund, you have to have already spent at least that much money on something the government approves of. Childcare is an obvious example. So its only different from a voucher in that it works backwards.Report

  6. Avatar DensityDuck says:

    People like to talk about how we should “eliminate all the subsidies like the mortgage-interest deduction”.  The assumption being that the government, upon receiving this huge new source of revenue, would cut taxes elsewhere as required to return to the baseline revenue level.

    Nobody ever explains why the government would actually do that.Report

    • Avatar Morat20 says:

      Nobody ever explains why the voting public would accept the loss of the deduction, either. It’s generally couched in “we’d replace it by X” implying that your total tax bill wouldn’t change, but very rarely does government go into the tax code without — by design or chance — screwing someone.

      Mortgage deductions tend to screw the middle class, because “your house payment” is a fairly significant chunk of change to the middle class. To the poor — who generally rent — it’s immaterial, and to the rich is such a tiny percentage of their income that it doesn’t matter.

      So I hear lots of theory-crafted changes to the tax code that don’t pass the “don’t tick off the masses” test, except in the “we’ll sneak it by them” sense.

      What’s politically possible tends to be screwing with the margins or the poor, since it’s less likely to create backlashes. Or cutting taxes, because who doesn’t like a tax cut?Report

      • Avatar Jaybird says:

        If there ever were a time to get rid of this particular tax deduction, it’s *NOW*. Rates are between 4 and 5% for a 30-year note which would make the impact as close to negligible as possible (compare to when rates were in the teens in the 80’s).

        If nothing else, we’d be able to stop hearing about how the middle class is the biggest recipient of welfare because of such things as the mortgage interest deduction.Report

        • Avatar Mike Schilling says:

          If there ever were a time to get rid of this particular tax deduction, it’s *NOW*

          You mean, now when removing it would cause even more mortgages to go into default?Report

        • Avatar Jesse Ewiak says:

          Nah, with student loans, the EITC, and various credits and deductions, the middle class would still plenty of money. Which of course, still makes it difficult to destroy the welfare state. Sorry about that. 🙂Report

        • Avatar Morat20 says:

          That’s great. To end the stupid rhetoric, we will do what the idiots promoting the stupid rhetoric want. I’m certain they won’t move onto something else….

          Mortgage deduction is relatively small fry. If you want to address it’s real issues in a way that has minimal impact, simply cap it to some amount relative indexed for inflation pegged to current interest rates. So, you know, 5% 30-year loan on 200k as the cap and let it rise with inflation. (Regular inflation, not housing inflation).

          That way you’re promoting home ownership, but not McMansions, and people who currently budget based on deducting aren’t screwed.Report

          • Avatar Simon K says:

            Its small fry for those who live in places where 200k buys you a house. Here it will buy you a one room condo somewhere where you’ll see shootings on the lawn in the morning. The only way anyone can afford to buy a home in the most expensive markets is because of the mortgage deduction, and if you cap it without lower tax rates at the same time, precisely those people will be f*cked.Report

            • Avatar Morat20 says:

              better half a loaf than nothing, eh?

              If the mortgage interest deduction is indeed distorting the market — a big if that I am not convinced of — surely a cap is a better example than getting rid of it.

              400k home loans with a 200k deduction means you can still deduct half of it.

              Still, more a matter for Congress — I’m leery of allowing regional or local housing valuations, as it’d just be complex and ripe for gaming to do things like base it off median housing prices for your zip code.Report

            • Avatar Kimmi says:

              get rid of the deduction on SECOND homes. Fix social security. voila! I am a genius! (not really, wasn’t my work)Report

            • Avatar James Hanley says:

              The only way anyone can afford to buy a home in the most expensive markets is because of the mortgage deduction,

              I’m pretty sure basic economic theory would suggest that the value of the deduction gets built into the sales price of the home. If you eliminate the deduction, people can’t afford homes at the price they’re currently being offered, so homes go unsold, so prices decline until, voila, people are buying homes again (stretching themselves exactly as much as they’re currently stretching themselves).

              I suspect the only actual effect of the mortgage tax deduction is to indirectly transfer money from the public till to real estate agents.Report

              • Avatar Simon K says:

                I’m sure that’s true. But once you’re in an equilibrium where millions of people have budgeted based on the deduction, how do you get out of it?Report

              • Avatar James Hanley says:

                I’m pretty sure it’s true, or we’re saying that taxes don’t influence behavior, subsidies don’t distort markets, etc.  But I don’t know how to answer your second question.  I think it would be wrong to eliminate it for current mortgages, precisely because it was built into the price, so you would effectively be retroactively raising the price of homes bought years ago–the more recently bought, the more you’re raising the price. It would have to be set to occur only on future purchases, and that’s going to have some kind of weird distorting effect–probably it would speed up home sales in advance of the rule taking effect because people would think they’re gaining (although that logic relies on them acting irrationally), and then cause a temporary, but possibly long, lull in home sales as they adjusted downward in price (at which point those who bought beforehand and are now trying to sell will be furious).  Ultimately it would all adjust as a market should, but there’s no doubt it would be dislocating and politically unpalatable.

                The question is, what’s worse–continuing the market-distorting subsidy or suffering the dislocation of ending it?  The economic answer and the political answer just don’t jibe with each other.Report

              • Avatar Mike Schilling says:

                And it still puts more mortgages underwater after the resale price adjusts downward, though not affecting the current affordability of the house. I can’t predict what effect that would have on the default rate, though it does represent a significant loss of wealth to those affected.  But what the hell, it’s not as if they’re all job creators.Report

              • Avatar Jaybird says:

                Imagine how much wealth we could create if we raised interest rates!Report

              • Avatar James Hanley says:

                Mike,

                That’s why I noted that if done it should only apply to future mortgages. I mean far enough in the future that the market can anticipate and react.  And sure as hell not at a time like the present (which is why I joked below about adding dislocation onto dislocation).

                Right things obviously can be done at the wrong time.Report

              • Avatar Mike Schilling says:

                Got it, James.  I misunderstood what you meant by “future”. .Report

              • Avatar James Hanley says:

                Simon,

                Forgive my needlessly quarrelsome opening sentence. I misread you as saying “I’m not sure that’s true.”  (Which struck me as an odd statement coming from you and should have been a tip-off to go back and re-read more closely, but of course I didn’t.)Report

              • Avatar Simon K says:

                No probs. I just though you were agreeing with me vehemently. I definitely agree we want to end the deduction (and real estate agents – talk about market distortions) but its an interesting political challenge in the context of US politics.

                Ideally I think you’d want to phase out the deduction over a period of time so that everything had time to adjust. Also, obviously, you want to wait for house prices to stabilize first and the foreclosure rate to drop first. The mortgage interest deduction equivalent in the UK was phased out over about 15 years, if I remember rightly, such that I was 10 when the legislation to abolish it passed, and I still got a tiny rebate on my taxes the first few years I owned a home. This would be enormously difficult in the context of US politics because congress would be unlikely to resist the temptation to restore the deduction and it would become one of those routine law/policy dichotomies like the doc fix and AMT, that just add to everyone disdain for congress as a lawmaking body that can’t abide by its own laws.

                The best bet is to abolish it as part of a wide-ranging tax reform including the removal of most other discriminatory deductions from the tax code, and the reduction of both the number of bands and the rates. Most people who benefit from the mortgage tax deduction also have complex enough taxes to benefit substantially from tax simplification and that would compensate for the inevitability of losing some money. Speaking for myself there, but I think it applies to others to.Report

              • Avatar James Hanley says:

                obviously, you want to wait for house prices to stabilize first and the foreclosure rate to drop first.
                Oh, I don’t know. There’s something to be said for adding dislocation on top of dislocation.  It keeps all the bloggers in business. 😉

                I think you’d want to phase out the deduction over a period of time so that everything had time to adjust.
                Agreed. But of course we run into the problem of government commitment. Sigh.

                The best bet is to abolish it as part of a wide-ranging tax reform
                I register my agreement with that entire paragraph.Report

        • Avatar DensityDuck says:

          “Rates are between 4 and 5% for a 30-year note…”

          And if all mortgages were new ones that started tomorrow that would matter.

          The guy sitting on an eight-percent ARM, if told that you were going to take away the mortgage interest deduction, would probably respond by burning his house down.Report

          • Avatar Simon K says:

            The only way anyone would be paying 8% on an ARM now would be if they couldn’t afford the house to begin with. In which case their best option probably is to burn it down. Or default, which has the benefit of being legal.Report

            • Avatar Patrick Cahalan says:

              Yeah, but it’s probably not as much fun as burning it down.Report

            • Avatar wardsmith says:

              Actually, that 4-5% is a lie. If you own more than a single dwelling, you are no longer in the “right” bucket for mortgage rates, and you /will/ pay the skimming price. I own 5 houses, I have over 830 credit score, I do NOT qualify for a 4% mortgage on any of them except the one I currently live in (which BTW is fully paid off). The system is bugged. Like all the best laws put together with the best of intentions, the ones concerning mortgages are indeed paving a fine road to hell.Report

              • Avatar Rod says:

                That’s because you can’t get out from under or renegotiate the first mortgage with a bankruptcy, so it’s a safer investment for the bank making the loan. And if those other four homes are investment (rental) properties then you are just deducting the mortgage interest as a business expense anyway.Report

              • Avatar wardsmith says:

                No disagreement Rod, just underscoring the lack of validity of the 4% meme. Duck was talking about someone sitting on an 8% ARM, of which there are millions /still/ out there. I personally have more options than other poor schlubs who followed the American dream into the toilet. In fact since my net worth vastly exceeds the value of the properties in question, I’d have to lose a LOT at blackjack to place myself in a position of bankruptcy, and the banks know that. The sorry fact today is that banks are simply not loaning money AT ALL. Ask any realtor, getting through the approval process is monstrously difficult. This is all part of our government sponsored fiscal repression and has a lot to do with the current economic malaise.Report

  7. Avatar trizzlor says:

    To understand not taking as a way of giving seems to require that we assume government was entitled all along to what it did not take. This seems quite wrong.

    This glosses over two major mitigating circumstances.

    1) The deficit: The government has already borrowed a bunch of money to pay for things we are using now, if we agree that government should pay back that debt then we agree that it is entitled to what it did not take.

    2) The legislature: The decision for government to “not take” (reduce tax rates) or to “give” (increase subsidies) does not sprout out of nowhere, that decision is made by a legislative body of elected representatives after jumping through all of the check & balance hoops we’ve agreed upon to make a fair law. Naturally, once that decision has been made the government does then become entitled all along to what it (previously) did not take … at least until we change the law. If I consent to my employer withholding (or ceasing to withhold) my wages for some benefit program, does that mean the employer was always entitled to what it did not take?Report

  8. Avatar Jeff says:

    My former colleague Will Wilkinson offers some insightful comments on our intuitions regarding taxes, subsidies, and fiscal policy. To wit:
    [quote removed for space]
    This is a narrative I generally agree with.

    Not me. I think it’s a problem with the right, and with libertarians, to wit: “the government collects revenue far in excess of that required to pay for its limited, legitimate activities” — what they think are “limited, legitimate activities” are not necessarily what I think are “limited, legitimate activities”.   They think protection of the poor and of minorities, and reasonable restriction on business is “far in excess” of it “limited, legitimate activities” .  (If not, let’s have an enumeration of these horrid activities perpatrated by the Eeeeeevil Gubmint.  Otherwise, I ain’t buying the stink they’ve been selling for so many years.)

    I see the Gentlemen nod their sage heads with the quote and I understand why they think the Democrats are “monstrous” and why they look with favor on a Republican Congress.  And I think of the friends I have who would be impacted by the cessation of these “illegitimate activities” and again, I shudder.  “Property Over People” is not a motto I could ever endorse.

    ==============================================

    Are cuts better than vouchers?  It depends.  A voucher can be a payment a business has to take — a school may think I don’t have enough income for my child, but they’d have to take a voucher.  Food Stamps (now TANF/EBT) in conjunction with counciling can lead to better nutrition choices than just not taking the money.  And generally, I think the people who get tax cuts would not be the ones getting the vouchers.Report

  9. Avatar Damon says:

     “The government has already borrowed a bunch of money to pay for things we are using now, if we agree that government should pay back that debt then we agree that it is entitled to what it did not take.”

     The gov’t borrowed money to fund a lot of stuff, most of it not within its constitutional restraints.  I shouldn’t have to pay debt off spent on stuff not permitted under the constitution.  Now if they want to find some Chinese rube to loan them the money that’s fine.

    “The legislature: The decision for government to “not take” (reduce tax rates) or to “give” (increase subsidies) does not sprout out of nowhere, that decision is made by a legislative body of elected representatives after jumping through all of the check & balance hoops we’ve agreed upon to make a fair law. Naturally, once that decision has been made the government does then become entitled all along to what it (previously) did not take … at least until we change the law. If I consent to my employer withholding (or ceasing to withhold) my wages for some benefit program, does that mean the employer was always entitled to what it did not take?”

     Please!  There are few checks and balances.  Voting is a fraud.  The game is intentionally rigged.  Besides, this statement assumes other people have a right to you property-money.  They don’t.Report

    • Avatar Morat20 says:

      The gov’t borrowed money to fund a lot of stuff, most of it not within its constitutional restraints.  I shouldn’t have to pay debt off spent on stuff not permitted under the constitution.  Now if they want to find some Chinese rube to loan them the money that’s fine.

      Interesting statement. It’s missing a few tidbits — How you became the sole decider of what was Constitutional is foremost. Admittedly that’s just a weirder take on “My taxes shouldn’t have to pay for wars I didn’t want!” which is, basically, a whiny complaint that you live in a representative democracy and not your own tiny kingdom, ruled by you.Report

  10. Avatar Jeff says:

    first we work to make money on the market, and then later the government swoops in and takes a bite from the fruit of our labour.

    This also seems to be going unchallenged.  The market doesn’t exist in a vacuum — it needs the government to provide stability, to furnish infrastructure (if people can’t get to your business, you won’t sell an awful lot), to provide a healthy populace (who will buy a lot more than an unhealthy one).  None of this matters to the Glibertarian — government is eeeeeeeevil, taxation is theft, blah blah blah.Report

  11. “Which kinds?”

    The non-entrepreneurial kinds, of course! The corporate class kinds! DUH!Report

  12. Avatar lunaticllama says:

    The fact that “the market” (any market) wouldn’t exist without government support and creation never seems to be recognized among libertarians.  If the U.S. government is so tyrannical, go move to a place without “out of control” government such as Somalia, Sudan, Afghanistan, and any number of frontier areas in the developing world.Report

    • Avatar Jason Kuznicki says:

      I think the truth is actually a lot more complicated.

      A “market” is a type of coordinated behavior, with norms of right and wrong conduct that describe how people should coordinate with each other.  Trying to act according to market norms is a strategy.

      That strategy most certainly can exist without a government.  All kinds of transactions happen all the time without the state taking any notice of them.  They always have and always will.

      But trying to act according to market norms can work out well, or not so well, or (sometimes) perversely.  Exactly how the strategy works out in practice may depend on a lot of things, including the existence of a well-functioning legal system, for which — yes — I’m glad we have a government.

      My sense is that people seem eager to pursue the market strategy in all kinds of places and under all kinds of conditions.  Adam Smith called it a natural propensity, and I think that in some ways this was an accurate description.

      The real question is — given that people will pursue this strategy — how do we set up society so that it works out to everyone’s advantage, or at least so that it doesn’t harm anyone or violate anyone’s rights?  The rule of law is an attempt to do that — to get good outcomes from a strategy that comes intuitively for most of us.

      Could there be law without government?  I don’t think we know how to do this.  (Optimistically I might say “not yet,” but then, you don’t seem well disposed to hearing my optimistic side.)Report

      • Avatar Roger says:

        The blind spot from progressives (and many religious conservatives) is often that they do not acknowledge the potential for order without top down design and coercion. The absence of top down design thus becomes mayhem.Report

        • Avatar Mike Schilling says:

          The blind spot of libertarians is not realizing that money isn’t just stuff, it’s also power.Report

          • Avatar BlaiseP says:

            I’m not sure I agree.  Libertarians simply do not understand markets.   Or the physics of entropy.   Somehow they maintain this delusion, all the evidence to the contrary, that there’s some order in the markets without regulation of risk.Report

            • Avatar Jaybird says:

              I wouldn’t call it a blind spot as much as a tertiary concern when compared to the person who says “I know how to regulate things. I will seriously make everything better for everybody, especially the poor. I Promise.” and then starts meddling.Report

              • Avatar BlaiseP says:

                The first step to effective regulation is a good sound Libertarian principle:  separate Winners from Losers.   No different than gambling in a well-regulated casino.   In the land of milk and honey you must put them on the table.

                When I see the Libertarians eating their own Force and Fraud brand dog food, very nutritious stuff may I add, and apply it to market regulation, then I will take them seriously.   And not one minute before.Report

              • Avatar Jaybird says:

                eating their own Force and Fraud brand dog food

                In the mean time, you’ll be able to watch force and fraud applied overwhelmingly here and sparsely there and two very different arguments given for why here is under oh-so-much scrutiny (“do you want children to die?”) and why there goes unhindered (“we only have so many resources, besides the chairman of that company is a close personal friend so I know he’d make sure his company is on the up and up”) and, magically, the established players collude with the government to raise barriers to entry for competition (among other things).Report

              • Avatar Jeff says:

                I knew “regulatory capture” (which we cannot ever escape EVAH) would raise its head sooner or later.  But adding wacthdog groups to avoid regulatory capture is never a propoer use of Gubmint, donchaknow.Report

              • Avatar Jaybird says:

                And you just *KNOW* that one of those people will bring up “rent seeking” and “corporate welfare” like broken records.

                They obviously want to bring back child labor.Report

              • Avatar James Hanley says:

                  But adding wacthdog groups to avoid regulatory capture is never a propoer use of Gubmint, donchaknow.

                Wait…you mean adding government-based watchdogs?  And they’ll be immune from regulatory capture….how?

                Hey, libertarians are all for government watchdogs donchaknow. They just think that non-governmental watchdogs are more likely to avoid regulatory capture than governmental watchdogs.

                I know, that’s just damn crazy talk.  Obviously if we add just this one more government agency, this time we can surely prevent it from being captured.Report

              • Avatar Roger says:

                “In the land of milk and honey, you must put them on the table.”

                Yea, but “hot licks and rhetoric don’t count much for nothin'”Report

              • Avatar Mike Schilling says:

                Only a fool would say that.Report

              • Avatar Roger says:

                But not until his dime dancin,’ is done.Report

              • Avatar Mike Schilling says:

                Has she finally got to you?Report

              • Avatar Stillwater says:

                and then starts meddling.

                But this begs the question. Presumably, the ‘meddling’ was justified by a state of affairs that was agreed upon as requiring a remedy. That the remedy wasn’t the right one, or led to bad outcomes is a different criticism, and one which accepts that meddling of one form or another s in fact justified.

                Short of meddling, how do you think we, as a society, ought to treat the poor? As I recall (could be wrong!) you advocate a minimal safety net for the impoverished so they can satisfy Maslow’s hierarchy of basic needs. Isn’t that a form of meddling?Report

              • Avatar James Hanley says:

                Presumably, the ‘meddling’ was justified by a state of affairs that was agreed upon as requiring a remedy

                Agreed upon by whom?Report

              • Avatar BlaiseP says:

                Let’s start with the glum collection of bankers sitting at the Fed on September 18, 2008. Sittin’ there on their overpaid asses, shitting little green apples while Bernanke told ’em “If we don’t do this, we may not have an economy on Monday”

                That’s who agreed first.Report

              • Avatar James Hanley says:

                Not even close, Blaise.  You’re taking the meltdown as the starting point, and ignoring all the regulations to fix alleged problems that occurred before the meltdown.

                And don’t give me any of that Glass-Steagall shit.Report

              • Avatar BlaiseP says:

                Shrug.  You asked who agreed.   I answered with the most obvious agreers.Report

              • Avatar Stillwater says:

                That’s the question begging part! I know that you, James, are in favor of minimal support for the poor (or at least, I think I’ve read you say as much). If so, then you and JB aren’t making the point you think you’re making. (Or so it seems to me.)Report

              • Avatar James Hanley says:

                Still, depends what you mean by “minimal.” I suspect our minima are not the same.  But see Jaybird’s comment below–I’m fine with that approach.

                I’m not sure what you mean by question begging in this comment.  Are you saying I’m begging the question or that you are?  To me it’s an essential question. I don’t really care what solution you devise if I get to define the problem for you, eh?Report

              • Avatar Stillwater says:

                It begs the initial question of what justified the problematic meddling to begin with. If the thesis is that redistributive welfare for the poor is a demonstration that meddling is always unjustified, but people still think that some form of assistance to the poor is appropriate, then the conclusion cannot be the meddling is always unjustified. So it begs the question of what constitutes a legitimate use of governmental power – which bothsides agree on!

                What’s really at issue is the extent of the meddling, or certain onerous types of meddling. But both you and JB (as libertarians) think that some meddling is justified.Report

              • Avatar Roger says:

                Stillwater,

                This is a really good point. I personally think that meddling is a big part of the problem.

                I compare it to playing a game, let’s say tennis. As long as the rules of the game are, clear, fair and consistent, we can have a great game.

                The problem develops when players learn they can influence the changing of the rules. Instead of playing a good game, their efforts go into lobbying for rules that advantage them at the expense of another style of play. If taken to an extreme, the game shifts from tennis to Rule Wrestling.

                I’m all for social safety nets and good basic rules of effective functional markets. The problem develops when we try to manipulate markets to influence winners and losers. We are destroying the game. We shift from a positive sum market game to what devolves into a zero or negative sum political game.Report

              • Avatar Jaybird says:

                Giving the poor the first couple of levels of Maslow’s hierarchy as part of a social safety net strikes me as being different (perhaps even significantly different) from the market regulation we’re discussing. Where it overlaps, if it overlaps, it seems to be an effort to protect established players from other people encroaching on them rather than ensuring that everybody has a level playing field.Report

              • Avatar Stillwater says:

                strikes me as being different (perhaps even significantly different) from the market regulation we’re discussing.

                Indeed. Your criticism isn’t against meddling, but a type of meddling. Or the degree of meddling. That’s precisely the point I was trying to make.Report

              • Avatar Jaybird says:

                A difference of degree, if large enough, becomes a difference of kind.

                Even if we can’t agree on that, I think we can agree that we are on a continuum between “where Jaybird would like to be” and “even more regulation” and it’s possible to move to, for lack of a better direction, the left for quite some time before we get to “where Jaybird would like to be”… and so when I argue against moving even more to, for lack of a better direction, the right, the counter-arguments come against arguing where I’d like to be rather than somewhere in the miles and miles of the gulf between where we actually are and where I’d like to be… with the obvious conclusion being that the only reasonable direction to go is the direction of even more government capture.Report

              • Avatar Stillwater says:

                Well, maybe. I think if libertarianism is distinguished from liberalism on this issue by how far above Maslow’s level of basic needs we can justifiably go (assuming agreement on those basic needs), then the distinction at the level of policy effectively really collapses. There are some libertarians who want to dismantle welfare programs because they’re a taking. And there are (at least hypothetically) some liberals who want to redistribute to the point of equality of outcome.

                The differences we’re arguing over here at the level of policy (again, on this issue) aren’t, in my mind, significant enough to warrant a distinction in terms of ‘isms’. We’re chipping away at the far out edges of things.Report

              • Avatar Jaybird says:

                The differences we’re arguing over here at the level of policy (again, on this issue) aren’t, in my mind, significant enough to warrant a distinction in terms of ‘isms’. We’re chipping away at the far out edges of things.

                I’d be delighted to agree to that if it meant that I wouldn’t have to hear how I want to watch the world burn for, oh, a few weeks. Until Vegas.Report

            • I’m quite sure I understand both the physics of entropy and markets, and yet I remain a libertarian.

              Besides, life defies entropy. The market, and language, and flocks of birds may be controlled, but both is and ought for libertarians is that they are controlled implicitly, through decentralized and organic mechanisms like preferences and price signals.

              Your argument here and elsewhere is sort of an egregious straw man. No libertarian suggests there should be no regulation of risk; on the contrary libertarians seems to argue disproportionately that the state should take an active role in enforcing voluntary contracts.Report

              • Avatar James Hanley says:

                Entropy as a critique of the market is fully as meaningful as entropy a a critique of evolutionary theory.

                In fact markets are remarkably analogous to evolution. In fact some claim Darwin’s insight was in part influenced by his having read Smith.  And Schumpeter provided a critical insight with his analysis of the role of the entrepreneur, which is essentially to create mutations with adaptive value.Report

              • Avatar Mike Schilling says:

                And if you’ve spent enough time with businessmen, you realize that evolution is a better metaphor than intelligent design.Report

              • I’ve actually seen a lot of scientifically-literate creationists take up entropy as a critique of evolutionary theory, and I’ve wondered about this. The fact that life defies entropy is what makes life so special. Why are we so reluctant to embrace chaos?Report

              • Avatar greginak says:

                Yes some creationists use entropy as a critique of evolution. Unfortunately , however scientifically literate, they don’t understand or know what they are talking about. Entropy rules in a closed system. Life on earth is not a closed system, we get oodles, that is the technical term, from outside the earth/system  from the sun. And the 2nd law of thermo does not say things can’t get more ordered in the first place.Report

              • Avatar Murali says:

                yup second law just says that ?G should be negative. It doesnt specify whether that is done by increasing entropy or temperature or reducing enthalpyReport

              • Avatar Jason Kuznicki says:

                Life doesn’t defy entropy.

                If the sun stopped shining, and if there were no way to radiate waste heat out of the biosphere, and if life kept right on going indefinitely, then it might defy entropy.

                It’s not doing that right now.  And if you think that these are mysterious conditions that I’ve laid down, then it just goes to show that you don’t understand the concept of entropy either.

                At best, life pushes entropy elsewhere.  But so does a steam engine. There’s no mystery about life in regard to entropy.Report

              • Avatar Mike Schilling says:

                It’s almost as if the Intelligent Designer arranged for there to be a massive source of negative entropy right (in astronomical terms) next door to us.Report

              • I’m not disagreeing with that at all, and I think you’re misunderstanding me a bit here.

                I’m addressing BlaiseP’s point above that self-regulating, spontaneously-ordered markets are inconsistent with entropy as he sees it.Report

              • Avatar James Hanley says:

                In fact evolution requires a bit of entropy–after all, what is a mutation but little bit of genetic entropy?Report

              • Avatar Roger says:

                Without entropy constantly sweeping the floor, I can’t imagine evolution working at all.Report

              • Avatar BlaiseP says:

                Where are they on market regulation?   Vewwwy, vewwwy quiet.   They’re hunting straw men.   The entire libertarian philosophy of market deregulation collapsed in a pile of shit and ruin in September of 2008 and they’re all standing around kinda denying it happened.

                Proof the Libertarians are out of their minds.  Christ, these people are actually pro-corruption.

                 Report

              • Avatar James Hanley says:

                The entire libertarian philosophy of market deregulation collapsed in a pile of shit and ruin in September of 2008

                Oh, so you are playing the Glass-Steagall card?

                Yeah, only deregulation could have caused that kind of economic collapse, not misguided regulation. Dogma’s great–it means never having to provide evidence.Report

              • Avatar BlaiseP says:

                (rolls eyes to heaven)  Quit trying to dodge the obvious point here:  OTC derivatives were not regulated.   When the CFTC tried to regulate them, Greenspan opposed it.

                Greenspan’s a Libertarian.   Are you here to say you’re for regulating OTC instruments?   G’wan, say whether you’re for or against pushing these risk instruments into regulated markets.   Let’s see how brave you are.Report

              • Avatar James Hanley says:

                Let’s say I’m not, just for the sake of argument.

                You say there’s no regulation of that risk. I say bullshit.  There may be no direct regulation, but there is a long-standing government practice of bailing out large firms.  So I’m running a large firm–how does that knowledge affect my behavior?

                Let the fuckers fail, swallow the damn pill, be sick as a dog for a while.  Next manager of large firm says, “shit, I’d better be careful; no-one’s going to bail us out.”

                If there’s fraud, of course, punish it. If there’s stupidity, let it punish itself.

                But to pretend that the foreknowledge of the likelihood of bailouts isn’t a form of regulation is deeply misguided.  Perverse incentives, moral hazard, yadda yadda.Report

              • Avatar BlaiseP says:

                That’s just so much pussyfooting.  Answer the question, as asked.   Should risk instruments be regulated or not?Report

              • Avatar James Hanley says:

                Blaise,

                The day you give a direct answer to a question, I’ll honor you by following suit.Report

              • Avatar BlaiseP says:

                Hee hee.  Dogma’s great–it means never having to answer questions.  You were given your evidence.   You were asked a question.   All the handwaving and tu-quoque in the world won’t save your wretched positions.  Real markets need real regulation.Report

              • Avatar James Hanley says:

                I gave you an answer. Let he who has ears to hear, hear.

                Let the fuckers fail; punish fraud.Report

              • Nob Akimoto Nob Akimoto says:

                The problem with this line of argument, James, is that banks were allowed to fail in substantial numbers from 2008 – 2010. Indeed the lesson of the financial crisis (if there was one) isn’t so much as “don’t trade in unregulated derivatives” as “don’t be smaller than Citi Group”.

                Granted by the time we got to 2008, there weren’t nearly as many financial institutions still standing (itself an artifact of several banking crises prior to 2008, most notably the regulatory environment post S&L crisis and Glass-Steagall repeal) to fail in the first place, and those that were left had become so largely consolidated that they represented a systemic risk to the entire economy.

                Letting large financial institutions fail isn’t really an option. We saw what happened when Lehman Brothers was allowed to die, and the fallout wasn’t pretty.  There’s a lot about financial markets that are simply beyond rationality. The fact that so much of it relies on imperfect information and signalling from investors suggests there’s something deeply wrong with the entire system that’s grown up around looser and looser regulated products. The main reason investment banking got off the ground so well was because commercial banking was so much more regulated after the Depression and S&L Crisis. I’m gonna go out on a limb here and say that even if we regulated all the problematic products (derivatives and credit default swaps, primarily, but also CDOs) like Blaise is calling for, there’s likely going to be another area of financial services that’ll crop up to fill that void.

                The question is, how do you give those unquenchable gamblers a market they can fuck up without putting the rest of the economy at risk.Report

              • Avatar Roger says:

                Functional markets are social institutions. They work via agreed and enforced sets of rules.

                If financial markets are dysfunctional, if the rules and protocols and incentives are perverse, then they should be corrected, from the top down, bottoms up or more likely a mix of the two.

                We should not incentivize perverse outcomes.

                One moderate libertarian’s view….Report

              • Avatar BlaiseP says:

                Here’s the fundamental problem:  James says we ought to allow the banks to fail.   That’s an interesting philosophical problem, one which requires information to determine if a bank has actually failed.

                The acolytes of Hayek say they have read him but will not apply his lessons.  The one sovereign lesson everyone ought to take away from Hayek is the value of information and price discovery, without which markets cannot operate.

                The question of how do we give those unquenchable gamblers a market they can fuck up without putting the rest of the economy at risk has long since been answered.  There’s a ready solution to this problem, one which has been used for centuries, the open outcry market and its follow-on simulacra, the electronic trading markets, where bets are backed by real money, not other bets.

                It’s not a matter of Big Bad Regulators.  That’s such a bullshit argument.  Want less-than-perverse outcomes?   Quit calling the creation of risk without the creation of information anything but what it truly is, writing checks without the money to back them and a clearinghouse to make sure they are.Report

              • Avatar Roger says:

                Blaise,

                If a market is ordered in such a way that failure of a firm leads to the apocalypse, then it is ordered wrong. It should be ordered differently. I would be surprised if James disagrees with this.Report

              • Avatar BlaiseP says:

                Ordered wrong?   Jeebus Chrispus, let’s get to the bottom of why these apocalypses happen.   Lack of information.   A insures B’s risk.   B insures C and D’s risk and D insures A.

                None of these guys know about the relationships created by the others.  A regulated exchange would reveal these facts.   There’s a reason we regulate insurance companies, the same reason we ought to abolish the OTC derivatives market.

                And no, all this Mutually Agreed Libertarian horseshit has to go.  Right away.  It’s pie in the sky nonsense.   Just quit making those noises.   Exchanges run markets.   They require both internal and external regulation and lots of it, to make sure real money’s being gained and lost.Report

              • Avatar James Hanley says:

                Roger,

                Why bother. To Blaise, the term “markets” mean only stocks and commodities, hence his singular focus on risk and derivatives.  You and I have a broader understanding of what markets mean, which informs our general view. Blaise doesn’t share that broader understanding of markets, and so he does not see the economic world in the way that you and I do.Report

              • Avatar BlaiseP says:

                Jeebus.   It’s like talking to my cat.   Tell you what, James, you say you’re something of a Libertarian?   Go read Hayek.   Come back after you get through what that worthy man had to say about information and prices.

                The aggravating part of this discussion?   Having to explain Hayek to a Libertarian.

                 Report

          • Avatar Roger says:

            Yes, but the blind spot of progressives is that the world is zero sum and that value can only be redistributed, when it can actually be created.Report

            • Avatar Mike Schilling says:

              Well, I my kids go to a school where they learn things that make them smarter, and apparently you went to one where you learn things like “the blind spot of progressives is that the world is zero sum”.  So in some cases things do even out.Report

            • Avatar Stillwater says:

              I don’t think that’s right. Progressives agree that there is some value in voluntary transactions above the monetary. The part you’re correct about is that – for a progressive (whatever that means!) – at any time slice t1 there is a finite and theoretically determinable amount of money (or assets, whatever) in the world and how it’s divied up and how it gets redistributed via transactions at t2 is worth considering. So the two views aren’t inconsistent – they just prioritize one value scheme and one analytical tool above another.Report

              • Avatar Roger says:

                SW,

                I would just add that it is also critical to consider what gets Created at T2., and T3….

                Rawls is a perfect example of “Let’s assume we have a pie….” Libertarians keep reminding that we need to first bake the darn thing. Prosperity comes from an increasing number of future pies.Report

              • Avatar Stillwater says:

                Yes, agreed. Which is a significant but also important and meaningful difference between the two views you’re critiquing.

                 Report

              • Avatar Roger says:

                Yes, see Eddie Murphyish apology below.

                I love The Golden Child! I guess this proves I have no artistic sense,Report

            • Avatar BlaiseP says:

              Not so.  I’m doing a yum update of Fedora 16, downloading 418 MB of improvements.   The world isn’t zero sum.   We fix stuff.   We improve stuff.   We deprecate old APIs and bring on new ones.

              The very idea — that the world is Zero Sum.  Hee, hee.   We don’t care how rich anyone gets.   We care about net improvements to the world as it is, viewing the world as it might be.  If only the few benefit and the many lose ground, we aren’t against the few.   That’s a completely bullshit argument.  We’re for the many.   Nobody has any intention of redistributing the wealth.   There’s plenty of it and loads more to be created.   There’s no excuse for anyone in the world to be poor.

              If our enemies accuse us of being Zero Sum Redistributionists, it’s because they’re fearful of genuine improvements such as truly open markets with meaningful information to drive them.   Look at this insane foaming and ranting about Single Payer.   Or regulation of securities and futures markets.   Who the hell can take these people seriously?   They’re dead set against anyone putting their cards on the table, preferring, in their own fearful stupidity, to cling to the world as it is, pushing harder than ever, against their own best interests, useless philosophical compatriots of the Taliban, for a world which never was and cannot be.Report

              • Avatar Roger says:

                Blaise I like the theme of your first two paragraphs. And we are all for open markets, transparency and effective rules and incentives (this is the whole point of property rights).

                I apologize for Progressive Baiting. I argue that you should argue with us rather than a caricature of us, but I was just as guilty above.

                “Forgive me, my brother Noomsy”Report

    • Avatar James Hanley says:

      @lunaticlama,

      The fact that “the market” (any market) wouldn’t exist without government support and creation never seems to be recognized among libertarians. 

      This is, of course, falsified by history.  Exchange occurred prior to the development of governments. Exchange occurs among chimpanzees. (Here’s one of my favorite journal articles ever, demonstrating that.)

      True, the type of market we have today would not exist without government, but some kind of market still would.

      Also, you mischaracterize libertarianism.  A crucial feature of extensive markets is protection of property rights and enforcement of contracts.  Libertarians believe government is legitimate for those purposes.

      Is there any goddam liberal around who’ll actually bother to learn something about libertarianism before they start lecturing us all on what libertarianism is?  Seriously, do your fucking homework!Report

      • Avatar Mike Schilling says:

         Libertarians believe government is legitimate for those purposes.

        “Some libertarians”. of course.Report

      • Avatar North says:

        Is there any goddam liberal around who’ll actually bother to learn something about libertarianism before they start lecturing us all on what libertarianism is?

        *Raises hand* At least in general that is, though I lean more neoliberalish. Actually a lot of the liberals around here know quite a bit about libertarians and a lot of libertarians around here know quite a bit about liberals. That said the discussions usually involve each group unloading round after round into caricatures of the other. I’m not quite sure why that happens. Probably because both sides are awfully close in many ways. There’s no spat like family spats.Report

        • Avatar James Hanley says:

          I agree that you have, North.  You’re one of the best commentors on this blog (not just one of the best liberal commentators, but one of the best, period) because you so rarely, if ever, fall into the trap of caricaturization.

          Given how I wrote my first sentence, I guess that means you are “goddamed,” but I mean that in the nicest way.Report

          • Avatar Stillwater says:

            Btw, James, this comment and North’s too reminded me of our exchange yesterday where I wondered how a libertarian can achieve market efficiency without heavy regulation. I wasn’t caricaturing libertarianism in that comment (if you thought I might be). The point I was making there was akin to what North said below about similarities between the views on some issues. That is, from my pov, any argument which says government intervention is justified to prevent X where X is above the normal courts and cops threshhold (externalities, say) is a liberal position. I get confused about that all the time. So when you say that well, no, a libertarian can achieve X Y and Z with government intervention that always sounds to me like the liberal view. So I get confused as to what the distinction between the ‘isms’ really amounts too. (And for the record, I’m not trying to collapse the distinctions between the two views so much as say that they just often collapse on me, as a matter of course as it were.)Report

            • Avatar James Hanley says:

              Stillwater,

              I didn’t take your comment badly because you asked a sincere question.  That’s always legitimate.

              As for the distinctions collapsing, I find it more meaningful to think of our ideological views as existing along a continuum, as continuous variables, rather than binary variables.  So it’s not like a two way light switch, where it’s either on or off, but more like a dimmer switch, where you have a range from full dark to fully bright.  Where does it switch from dim to bright?  Eh, somewhere along the way.

              What ultimately makes someone a libertarian rather than a liberal, or vice versa, is their collective, or perhaps average, position on a multitude of policy continuum.  There is sure to be overlap with other ideologies on some particular areas, but in general the libertarian and the liberal will have different composite scores.

              But even then, we have a composite score that’s still a continuous variable, so that a definitive distinction between where liberalism stops and libertarianism starts cannot truly be specified.

              I’ve got no problem being defined as a more liberalish libertarian than some other libertarians, and likewise I’d classify you as a more libertarianish liberal than some other liberals.

              Unfortunately, most of the world wants to insist on binary variables.  It makes classification easier, which eases our cognitive load, which ultimately is an indicator that lots of us who think we’re bright really don’t want to be bothered with having to think hard.Report

              • Avatar James Hanley says:

                Stillwater,

                Over at my place I have a graphical representation of  the political identity question.Report

              • Avatar Mike Schilling says:

                Conservative’s on first, Statist’s on second, and Liberal’s on third.Report

              • Avatar Jeff says:

                I dunno.  It sure seems  to me (and I’d love to be wrong) that libertarians put Property over People, and liberals put People over Property.Report

              • Avatar North says:

                 The basic gist of libertarianism is that by emphasizing property rights and government restraint people are helped more than they are by untrammeled regulation and government intervention done in the name of “helping people”.

                In my opinion while this is not exactly provable (at least until the advent of a libertopia) as a governing philosophy it does function extremely well as a powerful criticism of any given liberal project and one that should be applied with as much clear eyed serious consideration as possible when appraising such propositions.

                Personally I think that if liberals in America could cultivate a vibrant liberaltarian wing it would do both liberals and the country as a whole an enormous amount of good.

                .Report

              • Avatar James Hanley says:

                Jeff,

                There is no property without people, so it can’t be put over people.  There are only property rights that are held by people; so to emphasize property is to emphasize the property owners, who are people.

                It’s more than fair to say that’s not the best way to benefit people. But to deny the existence of the real-world people involved when we talk about property is to misunderstand what we’re talking about.  For example, in Zimbabwe the government denies people opportunity to claim property rights, and bulldozes their homes, whole villages, of people who have nowhere else to go.  We libertarians look at that and don’t go, “Oh, no, look what happened to those properties,” but “Oh, no, look what happened to those people because they had no property rights.”

                And what about the little old lady across the street from me, who owns her very small house and subsists on her Social Security check?  Doesn’t protecting her property rights–whether from government or a rapacious corporation–act to protect her?Report

          • Avatar North says:

            I’m blushing James, thank you. You mustn’t have read me much when I’m talking about conservative behavior. I’m hyperbolic and uncharitable to the extreme.

            On another note I’m sorry but I can’t accept your very kind off for a boundary waters trip. My husband not only has some plans for us during the end of that month but also looked at me like I’d sprouted an extra head and started drinking lager when I suggested canooing and camping.

            But sometime when I have ample free time I hope to return the favor. I hope your trip is a blast!Report

            • Avatar James Hanley says:

              looked at me like I’d sprouted an extra head and started drinking lager when I suggested canooing…

              Well, there’s your problem. I’d worry about you going canooing, too. 😉

              Sorry you can’t go, but if you ever offer me a sailing trip I hope I’ll be in a position to accept.  We can play Aubrey/Maturin, and perhaps I’ll debauch your sloth.Report

              • Avatar North says:

                My mother in Nova Scotia owns a modest little yacht. If the opportunity presents itself you can be certain I shall be extending an invitation (but only in the autumn or late summer in Nova Scotia mind: I like you too much to bring you to the wretched place in any other season). Or maybe we’ll both find some spare time and go work on the Mon Tiki.Report

              • Avatar James Hanley says:

                Regardless of climate, summer (before mid-August) is best because our fall term starts in late August.  But if it was necessary to go in fall (my favorite season for traveling), I could arrange someone to sub for me.Report

              • Avatar North says:

                We will work something out. Hmm perhaps something in early August. Most of the blood sucking black clouds are cleared out by August except on exceptionally wet years.

                My own personal saying: “God consigned Lucifer to Hell because not even Lucifers’ crimes were bad enough to warrant being consigned to Nova Scotia in June.”Report

        • Avatar Stillwater says:

          Probably because both sides are awfully close in many ways. There’s no spat like family spats.

          I tend to think you’re right about this. At least on a bunch of central issues. So the arguments are often structured around how each side is arguing for something completely different, and that’s why I’m not an L!.

          Oh well.Report

          • Avatar North says:

            I’ve always thought that, in America in particular, there’s an amusing contrast in that liberals (especially mainstream or party liberals) generally either agree with libertarians or have conceded to the libertarian positions (and just won’t admit it, see most of economics) but use libertarian unfriendly language. Meanwhile conservatives use (and frankly have co-opted) libertarian language and coat themselves in libertarian speak very heavily but are fundamentally fundamentally much less in agreement with libertarian positions. Wierd.Report

      • Avatar Jeff says:

        I think the assumption on the right is that first we work to make money on the market, and then later the government swoops in and takes a bite from the fruit of our labour.

        Do your fishing reading! (and learn about posting rules…)Report

      • Nob Akimoto Nob Akimoto says:

        Is there any goddam liberal around who’ll actually bother to learn something about libertarianism before they start lecturing us all on what libertarianism is? Seriously, do your fucking homework!

        …my dear Doctor, I have a degree in political science, and 9/10ths of a degree in public policy, I’m well read on political philosophy (I in fact have a dog-eared copy of The History of Political Philosophy edited by Strauss and Cropsey) and have the mental scars of having had to read everything from Mandeville to Ricardo to Smith, and I have to say…I still think on the whole the libertarian movement is far too happy to cling to Austrian hocus-pocus, with an over emphasis on contract and property rights over conceptions of externalities as well as things like the commons.

        Oh, and may I trouble you for the salt?Report

        • Avatar BlaiseP says:

          I swear, trying to deal with these Austrians is like talking to Creation Scientists or Flat Earthers.

          The weird thing is, if they understood the first thing about the calculation of risk or how banks make money, they’d understand how bank panics happen and integrate it into their ideas about human nature.   Thereafter, it would pass through their guts and cure what’s wrong with them.Report

          • Avatar Mike Schilling says:

            You know what other Austrian had dangerously wack ideas about bankers.Report

          • Avatar Stillwater says:

            Thereafter, it would pass through their guts and cure what’s wrong with them.

            I actually have no idea what that means, but it’s brilliant. Artisitically brilliant. And doesn’t that settle at least one debate about aesthetic realism going on in these parts lately?Report

          • Avatar Kolohe says:

            I swear, trying to deal with these Austrians

            I thought Dr. Hanley was originally from New Zealand?Report

            • Avatar BlaiseP says:

              FRANZ: You may produce my play…
              MAX: Excellent!
              FRANZ: …but only if you vill take the Siegfried Oath.
              I solemnly svear…
              MAX & LEO: I solemnly svear…
              FRANZ: …to obey the sacred Siegfried Oath…
              MAX & LEO:…to obey the sacred Siegfriend Oath…
              FRANZ:…und…
              MAX:…und…
              LEO:…und…
              FRANZ:…never, never, never…
              MAX & LEO:…never, never, never…
              FRANZ:…dishonour ze spirit und ze memory of Eugen Böhm Elizabeth von Bawerk!
              MAX & LEO: Dishonour the … Elizabeth?
              FRANZ:Ja. That vas his middle name.
              Not many people know it, but the Austrian economists was descended from a long line of English queens.Report

            • Avatar James Hanley says:

              Kolohe,

              Not unless New Zealand is in Indiana.

              I think you’re thinking of James K.Report

          • Avatar Jaybird says:

            I swear, trying to deal with these Austrians is like talking to Creation Scientists or Flat Earthers.

            Part of the problem is that the Keynesians and Monetarists are the ones in charge, like, 100% of the time. Then, when we get into a bubble, the Keynesians and Monetarists point at the Austrians and laugh at how they’re party poopers and, when the bubble pops, the Keynesians and Monetarists point at the Austrians and point out how unrealistic their solutions actually are.

            Here’s a quick test: “The time to avoid a hangover is when you’re drinking at the party.”

            Does that sentence strike you as:

            A) Trivially true

            B) Unrealistic given human natureReport

            • Nob Akimoto Nob Akimoto says:

              No, the problem is that most people who buy into Austrian economic theory are economically illiterate and don’t actually know a micro from a macro theory. Their conception of business cycles is intuitively neat, but not empirically sound. It’s what you get when you start a theory from first principles.

              If we want to use cutesy metaphors like you’re fond of doing, it’s a bit like knowing that breathing oxygen has an ultimately corrosive effect on the body, which the Austrians will loudly proclaim is the case. Then they propose that the only way to really fix that is to not breathe at all.

              I don’t think James or Roger are actually Austrians (from what I can tell, James seems to adhere to something similar to New Institutional Economics while Roger has made noises about liking Behavioralism). But on the broader libertarian movement, perhaps as a result of having Rothbard around and an emphasis on the works of Hayek and Mises.Report

              • Avatar Jaybird says:

                I suppose the conclusion that it’s not empirically sound could be reached from the fact that people in power will always, without exception, prefer to listen to Keynesians and Monetarists and try to get them to act like Keynesians in fat years if they’re prone to act like Keynesians in lean ones or to try to get them to act like Monetarists in lean years if they’re prone to act like Monetarists in fat ones… but, I suppose, it’s easier to compare Austrians to Michael Hutchence.Report

              • Nob Akimoto Nob Akimoto says:

                Old school Keynesians (if there in fact any still left) are rather thin on the ground. Monetarists still exist (afterall Friedman had many disciples) but they don’t seem to be particularly common in central banking circles at the moment, with the emphasis on inflation targeting. (For example I don’t think there’s a single monetarist in the European central banking system at the moment…)

                In so far as there’s not been any explicitly “Austrian” policy solutions to economic crises, it’s partly because the cure would be akin to euthanasia. The notion of going back onto a hard currency standard and banning fractional reserve banking is absurd. That there are people still pushing for it speaks more about their religious zeal than their empirical analysis.

                As far as overall economic theory is concerned, part of what you might see as an overabudnance of :”orthodox” economics, is that a lot of the trenchant critiques leveled by Hayek and Mises have been internalized in neo-Keynesian and post-Keynesian economics. The influence of credit availability on asset bubbles for example, is something that early Austrian economics helped popularize, as did things like information limitation to preclude the ability for central planners to adequately work an economy.Report

              • Avatar Jaybird says:

                Well, then. We just need some neo-Austrianism. That way, when people complain about the futility of going back onto a hard currency standard or banning fractional reserve banking, we can roll our eyes and say “*NEO*-Austrianism.”Report

              • Avatar Jason Kuznicki says:

                I’m inclined to think that the theory of the business cycle is the weakest part of Austrian economics.

                The strongest parts of Austrian economics are its interventions in the socialist calculation debate and its critique of the equilibrium model of the market economy, which stresses that the function of an economy is not to tend toward or instantiate equilibrium at all, but to incentivize the discovery of new information; equilibrium properly understood is the thing the economy tends toward when no new information is capable of being discovered, and we have no reason whatsoever to want this state of affairs to take place.

                That said, my view of Austrian business cycle theory is that it is sometimes and partially correct.  It didn’t describe everything that appears to have happened in the last recession, but trying to tell the story without discussing artificially low interest rates just isn’t going to work.  Other recessions, however, don’t seem to have had an Austrian basis.  Arnold Kling is doing some very interesting post-Austrian work on business cycle theory lately.  He’s definitely worth reading.

                 Report

              • Avatar James Hanley says:

                I’m inclined to think that the theory of the business cycle is the weakest part of Austrian economics. The strongest parts of Austrian economics are its interventions in the socialist calculation debate and its critique of the equilibrium model of the market economy

                Jason, I am 100% in agreement with this claim.Report

              • Nob Akimoto Nob Akimoto says:

                I’m still going to go with “policy solutions that have no basis in political or economic reality” as the weakest part of Austrian economics….

                But on the critique of the equilibrium model.

                The problem in so far as I can see of critiquing the equilibrium model, is not so much the fact that it’s not possible to reach equilibrium in an economy (I’m inclined to agree here) but whether or not equilibrium is desirable. A lack of equilibrium pricing would mean substantial inefficiencies in the production of a particular good. Now granted, it’s that inefficiency that makes firms profitable….Report

              • Avatar James Hanley says:

                Not intending this as a poke at Nob, but just as most people who think they’re Austrians can’t tell a micro theory from a macro theory, most people who mock Austrian economic theory can’t tell a Bohm-Bawerk from a Hayek.

                And anyone who thinks Hayek didn’t add to our understanding of economies has no business mocking anyone’s grasp of economic theory.Report

              • Nob Akimoto Nob Akimoto says:

                Arthur Laffer added to our understanding of economies, but that doesn’t mean we should listen to all his policy prescriptions as if they were exclusive in themselves. (The fallacy of supply-siders who think you can cut taxes to infinite revenue)

                Hayek had some critical insights into problems of central planning, just as Marx had some very useful insights into the industrial capitalist order of 19th century Britain. It does not stand from those insights that you should construct an entire socio-political order that’s predicated on emphasizing the superiority of market outcomes over any other considerations of society, like some of his more extreme positions advocated philosophically.Report

              • Avatar James Hanley says:

                Nob,

                I consider myself a public choice person, which does put me pretty much arm-in-arm with the New Institutional Economists.  Doug North, and so on (who I had the pleasure of hearing talk once; a very good speaker, and a very down-to-earth and friendly guy, not that I got close enough to meet him personally). And being an empiricist, I very much like behavioral economics–it’s the future, and we’d all better pay close attention if we really want to understand.

                I like Hayek, but Rothbard, Mises and Bohm-Bawerk don’t impress me a whole lot.  They’re not economically illiterate, but I think they’re too unempirical.  Hayek disliked the rigidly mathematical approach to economics, but that’s not quite the same as being unempirical–his concern was that the mathematical approach was too theoretical, not that it was too empirical.Report

              • Nob Akimoto Nob Akimoto says:

                Don’t get me wrong, I’m not a huge fan of “economics as physics” models of super econometrics.Report

        • Avatar Roger says:

          Nob,

          The libertarians on this site have expressed ample concern for externalities and the commons (if memory serves we had dozens of comments on how to solve problems in the commons earlier this month), and none have resorted to hocus pocus.

          I ask two things, rather than one like James. Know what you are talking about before you criticize us (I assume you do) and second address us rather than the generic libertarian caricature of your choice.

          I’m as guilty as the next person of failing occasionally at the second point. It gets in the way of the discussion.Report

          • Nob Akimoto Nob Akimoto says:

            On the second, I try, in general to address specific claims being made.Report

          • Avatar Stillwater says:

            Personally, I think the dispute comes down to an age old one: first principles vs empirical evidence. That’s not to say that one side invokes more a priori reasoning than the other, but that where one side argues from the evidence, the other is arguing from first principles, and vice-versa.

            In another sense, I think it reduces to perspective, or pov, of the exact same data set. So, both liberals and libertarians believe that the ieal level of government involvement in markets is that minimum required to maximize social utility, or economic efficiency, or whatever. The libertarian approach then relies on a conceptual scheme which posits that if principles A, B, C… are instituted by government, and only those, we will have maximized total efficiency (or social utility, etc). And the liberal may in fact agree with this on a conceptual level. That is, the liberal may concede that if governmental institutions enacted and enforced all and only A, B,… , and markets were allowed to function within only that minimal baseline of regulatory intervention, we would attain optimal levels of efficiency.

            So the issue, much like the one about welfare, is what is the minimum baseline sufficient to maximize efficiency? I think liberals and libertarians agree that penalties for fraud and contract enforcement are necessary components. But with respect to the issue James was addressing above, letting too-big-to-fail institutions fail has a tremendous social cost. So, it’s easy to say in the abstract that the right prescription is to let them fail and let them know that government will let them fail and just this one simple change will prevent excessive risk taking.

            But I think, maybe incorrectly, that this gets to the very heart of the differeing views. The libertarian, it seems to me, relies too much on institutional rationality for this view to be practical. Institutional rationality, on one way of looking at it, is the sum total of individual rationality within the institution, and the sum total of individual rationality may conclude that excessive risk is justified based on an a purely rational analysis. So risk taking won’t necessarily be curtailed simply by eliminating the bailout option. On the other hand, the view also permits (or is ideologically neutral about) the existence of too-big-to-fails. Back in the day, the progressive view on this was to limit the size of institutions (for various reasons), but libertarians cannot advocate for this. So, we’re left with a libertarian analysis which trades the likelihood (I think a libertarian would say it’s more than a likelihood, of course – something approaching necessity) of institutional rationality prevailing in too-big-to-fails against the social consequences of being wrong about that.Report

            • Avatar Jaybird says:

              There’s no such thing as “too big to fail”. There is, however, such a thing as “unsustainable”.Report

              • Avatar Stillwater says:

                There’s no such thing as “too big to fail”.

                Not on an objective level. But according to certain value schemes and pragmatic considerations there is.Report

              • Avatar Jaybird says:

                A value scheme that says that there is an X where, objectively, we all know that there is no X is bound to have to deal with X not existing sooner or later.

                To my knowledge, there has never been a later that was better off than a sooner would have been.Report

              • Avatar Stillwater says:

                JB, the point is that TBTF is subjectively determined. Or at least determined only relative to other considerations.

                I’m not sure what the rest of the comment has to do with the semantic point. But I can think of one readily apparent procreatively oriented counterexample to your ‘better sooner’ principle.Report

              • Avatar Jaybird says:

                “I’m not sure what the rest of the comment has to do with the semantic point.”

                TBTF + Unsustainable = Will Fail And Will Fail HARD

                “But I can think of one readily apparent procreatively oriented counterexample to your ‘better sooner’ principle.”

                What?Report

            • Avatar James Hanley says:

              “The libertarian,”

              Sigh. There we go again, lumping them all into one category.

              It’s like the old “what does the negro want” trope.

              “Hanley and Kuznicki and Jaybird and Christopher Carr, they’re all right, but ‘the libertarian’…”Report

              • Avatar Stillwater says:

                Damn this is getting tiring James. I also said ‘liberals’ without distinguishing between types and subtleties and nuances.

                Christ, give the writer a little bit of room to present a view instead of setting up unattainable ground rules. I mean, do I have a substsantive position here or am I simply caricaturing your view to score cheap points?Report

              • Avatar James Hanley says:

                I agree, it’s getting very tiring. I don’t agree with your solution, though.

                But to get to your point, I don’t know what exactly you mean by “institutional rationality,” so I can’t respond. Libertarians of my stripe–public choice inclined folks–view the concept of institutional rationality with a bit of jaundiced eye. It can be used, but only with great care. Only individuals can be rational, and there is no institutional arrangement that can with any certainty result in a collectively rational outcome (see Arrow’s Impossibility Theorem). I suppose I’d define a rational institution as one that doesn’t create any perverse incentives.  That doesn’t perfectly characterize the market, but it characterizes government even more poorly.

                As to “first principles v. empirical evidence,” you seem to think libertarians are ignoring empirical evidence.  But we do tend to observe government and notice the ways in which it distorts efficiency, creates perverse incentives, promotes rent-seeking, and abuses its power.  I would call that empirical.

                As to letting too big to fail institutions fail, you miss the libertarian perspective, which is that institutions big enough to cause massive social harm are unlikely to develop in a truly competitive market system, and generally can only exist when they are protected to some degree from competition, and are especially likely to develop precisely because they bet on being bailed out.  So it’s wrong to say that libertarians don’t think there ought to be limits on the size of institutions–as so frequently happens, you’ve conflated not wanting a formalized governmental rule with not wanting the outcome.  You may think that we are wrong about what the outcome would be, but please stop assuming that just because you are persuaded that our proposals wouldn’t result in a particular outcomes that we must not want those outcomes.

                After all, Lysenko didn’t intend to starve tens of millions of people to death, and Lyndon Johnson didn’t intend to create an intergenerational welfare trap (and I know liberals who get damned mad at conservatives for claiming that was the intent).

                In a nutshell, you’ve learned more about libertarianism than the average liberal, but you’re still at a level where you need to be asking “is this what they’re saying,” rather than asserting “this is what they’re saying.”

                Indeed it’s getting old.Report

              • Nob Akimoto Nob Akimoto says:

                *Sigh* I’m sorry James. I’ve been laid by the lee many a time with my argument style, and I feel like I’ve obviously failed to communicate what I was trying to do so here.

                My response was targeted specifically at the libertarian political movement in the United States (hence my appending of “movement”) rather than the libertarian political philosophy itself.

                I will not the mea culpa that I do not think libertarianism as a political philosophy is economically illiterate, nor do I think it’s incapable of grasping externalities and common pool resource problems.Report

              • Avatar Roger says:

                Nob,

                For what it is worth I share no affection for mainstream libertarian politics either. Seems like an oxymoron to me.Report

              • Nob Akimoto Nob Akimoto says:

                That should read “I will note the mea culpa” not “not the mea culpa”Report

              • “Libertarian movement” is kind of an oxymoron, isn’t it?

                I thought we were all like herding cats and stuff.Report

              • Avatar Jaybird says:

                Herding cats… WITH BOOZE!!!Report

              • Avatar Stillwater says:

                Just saw this:

                but you’re still at a level where you need to be asking “is this what they’re saying,” rather than asserting “this is what they’re saying.”

                Indeed it’s getting old.

                I submit that this is bullshit. Your conception of libertarianism might take a lifetime to learn. In fact, I have no doubt that’s true, since the entire collection of your experiences shape your own views  of political economy. But if the theory is freestanding, and shared, and explicable, then there are some easily identifiable principles which distinguish it from other theories.

                I think you confuse disagreement with liberatarian positions with a confusion about them. And just as tired as you are of feeling mishcaracterized, I’m tired of being called an asshole because my understanding of libertarianism is that it isn’t a coherent view of political economy. I mean, I could go on and on about all this, but you moderate liberatarians want to split hairs between liberalism and classical libertarianism as if distinction emerges as some kind of bright line, but the line you keep implying distinguishes us – it seems to me! – just isn’t there. If it was, why do you think you’d have to repeat ad-nauseum to otherwise very intelligent people that non-libertarians just don’t understand me!?!

                 Report

              • Avatar James Hanley says:

                Stillwater,

                Speaking only for myself, I think I’ve been pretty clear about denying bright lines between liberalism and libertarianism.

                Indeed there are some easily identifiable principles.  They have to do with being skeptical about government action, preferring voluntary exchanges to coerced ones, and being optimistic about the outcome of most voluntary exchanges.  That’s my libertarianism, I think that’s about as much of a core of libertarianism as you’ll find, and it doesn’t take a lifetime to learn.

                But when you start imputing specific policy prescriptions, or more narrow ideas, then you’ve moved beyond the generally applicable principles.  It’s like shifting from “liberals believe free markets will inevitably have some degree of unfairness” to “liberals don’t believe there should be markets.”

                Even in this comment you say, “my understanding of libertarianism is that it isn’t a coherent view of political economy,” which either again lumps all libertarians together or is superficial (the same general statement would apply to liberalism or conservatism, so it doesn’t mean much if talking about the ideology in general; but if I meant it say no liberals or no conservatives have a coherent view of political economy, then I actually have to defend it, not just state it).

                That’s where you keep going wrong.  I don’t care if you’re tired of hearing it. You’re coming from outside and trying to tell us what we are and believe. Consider the member of any in-group faced with the outsider telling them what they really are, and–from the insider’s perspective–not getting it right.Report

              • Avatar Stillwater says:

                Consider the member of any in-group faced with the outsider telling them what they really are, and–from the insider’s perspective–not getting it right.

                That’s only true if there is emotional, or subjectively based experiences that are constitutive of the perspective. Presumably, libertarianism is a collection of objective statements about political economy which are justified by other objective statements (including normative ones!), and whose entailments are also expressed by objective statements. If so, then I’m entitled to critique those statements without hurting anyone’s feelings.

                How familiar must I be with your inside-libertarianism perspective before I can critique it? If I knew everything that you know is it possible I could still disagree?
                Report

              • Avatar James Hanley says:

                Stillwater,

                Maybe I’m over-reacting, and I don’t mean to personally attack you or cast aspersions on your character.  But few things bother me as much as lumping.  To some extent obviously we have to talk about groups, but I think it is never appropriate to say “the X” as though some one person can stand for the group.

                “The liberal thinks” is a shitty term.

                “The conservative believes” is a shitty term.

                “The Negro wants” is an offensive and racist term (and the fact that it has at times been commonly used by African Americans makes it no less stupid and offensive).

                “The white man” is an idiotic concept.

                “The Chinaman,”… “The Jap…” “The Mexican…” “The Christian…” “The Muslim…”

                It’s a phrasing that should be stricken from any thinking person’s vocabulary.  You’re a thinking person.

                There, that’s my polemic for the day.  Back to grading (which is a perfect univariate explanation for my irritability; I actually had a student write, in a paper whose instructions said to avoid partisanship, “‘cabal, intrigue, and corruption,’ which, interestingly enough, are the three virtues embossed on the Clinton family coat of arms.”–that’s idiotic, too.)Report

              • Nob Akimoto Nob Akimoto says:

                Who is that student taking writing lessons from? Shitty Fiction Writers 101?Report

              • Avatar Jaybird says:

                “And he’s probably putting himself through school by working at the Jerk Store! As well as through copious use of loans and grants made possible by our public social safety net.”Report

              • Avatar Brandon Berg says:

                That name is a bit misleading. It’s actually a sophomore-level class.Report

              • Avatar Stillwater says:

                Maybe I’m over-reacting

                Maybe. I just don’t know at this point how any discussion of libertarianism or a critique of it is possible without you yelling about how non-libertarians get things wrong. The being of discussion are increasingly being set by your own idiosyncratic conception of it. Further, in the above concept, I was specifically disputing your suggestion that the solution to negative effects of regulatory-capture and institutional risk-taking is to let institutions fail. That’s the view I was disagreeing with, a view you specifically articulated upthread. So I don’t know in what way I am mishcaracterizing “libertarianism”, or “James conception of libertarianism” when I simply accept what you propose as a solution and disagree with it.

                But really, James, if your view is so nuanced and hard to understand that even people like me who’ve patiently listened and incorporated your criticisms into a fully understanding of what you mean by the term, but we still can’t get it right, then I don’t the fault is in us anymore.Report

              • Avatar Stillwater says:

                Wow, is that comment garbled. (Note: don’t write while watching hockey!)Report

              • Avatar Stillwater says:

                But few things bother me as much as lumping.

                Well, then relativize the discussion to more discrete units: you and me. I mean, you keep insisting there is this significant difference between our theories, our policies, our preferred values, our analytical methods. If there isn’t a category difference captured by all those distinctions, then we’re talking about subtle shading on the edges of things. But if there is a category difference captured by all that, then the lumping seems entirely appropriate since there are clear-cut divisions distinguishing two schools of thought on these matters.

                 

                 Report

              • Avatar James Hanley says:

                Stillwater,

                The category difference is that libertarians apply their skepticism of government across the board, while liberals tend to apply it more consistently in social matters than economic matters.  That is a category difference.

                But that doesn’t mean there will be a distinct category difference in every possible policy response–for some libertarians, the most strict, there will be. For others, it will just be a different point on the continuum.  As in, “yes, we can regulate externalities, but there are fewer externalities that we see as being worth regulating and we often prefer more of a market-mimicing approach rather than a command-and-control approach.

                By insisting that there’s either a strict always-distinguishable category difference or that there’s no substantial difference at all, I think you’re making a fundamental logic error (that in itself has nothing to do with the ideologies in question).Report

              • Avatar Murali says:

                I’ll go with Stillwater here. I say liberals this and liberals that all the time. In fact, there are lots o philosophers who do stuff like this. Not to mention, how liberalism is defined in philosophy papers and how it is used in mainstream US political discourse can be very different. To a lesser extent, so is the way libertarianism is used within and outside of philosophy departments.

                Maybe libertarianism is a bit too chimerical a term for any single use of it to fit everyone who self identifies as one while excluding those who don’t. Maybe we should instead use terms like neo-classical liberal or RawlsekianReport

              • Avatar Stillwater says:

                Murali, Thanks for the support! Part of the problem we’re getting bogged down in here is at the meta-level. If it’s true that there are too many sub-divisions within the libertarian ‘ism’ for a coherent discussion about the theory, then maybe your solution is right: come up with a new label to distinguish it from other types of libertarianism. Then when I say ‘libertarians hold view L’, James can languidly respond with ‘You clearly aren’t talking about my beliefs, cuz I’m not a libertarian!’

                But for the record, the view I attributed to libertarians in the initial comment of this sub-thread was a view expressed and held by James himself! So the criticism that I was talking about ‘all libertarians’ seemed particularly inapt at that point. I was talking about him!

                 Report

              • Avatar James Hanley says:

                Stillwater and Murali,

                If the use of “libertarians think X” is related to the general skeptical approach to government, and the general favoritism toward markets, then it is all good.  But nearly always when it is used for a specific policy approach it is used to refer to the more extreme libertarian approach to that policy; then it is not good.

                And the language of “the X,” whether it is libertarian, liberal, conservative, black, white, male, female, etc., is always careless at best, and frequently expressive of a bigotry that sees all  Xers as a monolithic group, denying their individuality.  I am sure Stillwater was not intending to use it that way, but it’s use in that way is so common (in general, not even about libertarians), that I think it is wise to avoid it.  It smacks too much of “the Negro…” which is racist precisely because it denies individuality.

                E.g., “The liberal uses class analysis.”  (Well, no, even though some do.)Report

            • Avatar Brandon Berg says:

              The libertarian, it seems to me, relies too much on institutional rationality for this view to be practical.

              This is actually one of the main libertarian critiques of leftism. See, for example, the idea that the failure of laissez-faire markets to produce perfectly optimal outcomes necessarily justifies government intervention. Or the idea that behavioral economics is necessarily a justification for government intervention. Actually, that’s a subset of the first one. Come to think of it, they all come down to some variation on the first one.

              One of the key observations supporting skepticism of government interventions is that people tend to be more rational when making market decisions than when making political decisions, because they directly, and usually relatively quickly, reap the benefits and bear the costs of their market decisions, whereas the costs and benefits of political decisions tend to be uncertain (a single vote is rarely decisive), widely dispersed, and often far removed in time from the point of decision-making. You might as well flip a coin, for all the difference it will make to you, personally.Report

              • Avatar Brandon Berg says:

                Basically, politics makes people stupid, whereas markets make people smart. So we should aim to move as many decisions as possible out of the realm of politics and into the realm of markets, except where the benefits of a political approach are so overwhelming that they swamp the political stultification effect.Report

              • Avatar Stillwater says:

                This is actually one of the main libertarian critiques of leftism.

                Agreed about that. My comment was specifically focused on the issue I was addressing in the comment: that eliminating bailouts and other capture from the equation would eliminate private sector risk-taking. That’s the reliance on institutional rationality I was questioning: that doing so would require (causally) a higher level of rationality from economic actors. I think that’s false. The other point I was making is that a liberal considers the consequences of letting too-big-to-fail actually fail unnacceptable. Now, thru the argument the libertarian (sorry James!) can say that if it weren’t for governmental intervention, there would be no institutions that ever attained a too-big-to-fail status. That’s something we disagree about. But from my pov it’s also irrelevant, or at best a secondary concern to the topic at hand which is whether the consequences of any particular failure are worth trying to prevent (via bailouts of one form or another, say) or not.Report

              • Avatar Stillwater says:

                I think that’s false.

                Eg., Countrywide closed on questionable mortgages and passed the risk on to others, and they did so without any protection from TBTFstatus.Report

              • Avatar BlaiseP says:

                Too Big To Fail is something of a red herring.   Too Interconnected To Fail is the actual problem.   When Sept 15 2008 arrived, the banks were completely constipated:  nobody was loaning to anybody.  Why?   Because everyone had been playing fooly-fooly with risk, hedging in the dark.    All those investment houses had been putting off risk onto other parties with ad-hoc insurance policies, to the point where nobody had a clue how much risk was piled up.   When the insured tried to collect, everyone was attempting to collect, all at once.

                Too Big?  Nah.   If they were big enough, they would have survived the panic of 2008.   Lloyds of London insures the otherwise uninsurable and when those Names are called on to pay out, they do, in total and in cash.Report

              • Avatar James Hanley says:

                Blaise,

                I will agree on the “too interconnected to fail.”  That took TBTF from the realm of just being about a particular company to being about a whole industry.Report

              • Avatar James Hanley says:

                “Eliminate” private sector risk taking?

                Nobody’s talking about “eliminating” it–we’re talking about allowing them to benefit when the risk works out well, and suffer when it doesn’t.  But no libertarian that I’ve ever heard speak talks about “eliminating” risk taking in markets.  Geez, Stillwater, they tend to be all in favor of it!Report

              • Avatar Stillwater says:

                I’ll chalk this up to a desire to criticize rather than a substantive point, since it’s entirely clear in the context I’m talking about a specific type of risk-taking: the kind presumably encouraged by the existence of bailouts. Which was your argument, not mine.Report

              • Avatar James Hanley says:

                that doing so would require (causally) a higher level of rationality from economic actors. I think that’s false.

                Either disputing the reality of the effects of moral hazard, or you’re saying they won’t actually face any increased risk.

                And you’re doing this while accusing others of having an incoherent economic view.Report

              • Avatar BlaiseP says:

                As Hayek points out, we need meaningful price information to reach rational conclusions in the market.     In Hayek’s time, such information was hard to get.   This makes his point even more salient in our times, when we could get that information but it’s being hidden by institutions who should be forced to reveal it.Report

              • Avatar Stillwater says:

                No, James. I’m saying that your proposal isn’t sufficient to correct the underlying problem. Or, to make it crystal clear: I’m disagreeing with you.Report

              • Avatar James Hanley says:

                Stillwater,

                But I don’t understand where your disagreement lies. “the underlying problem” is tolerably vague.  Moral hazard is a pretty clear concept; so is increasing the personal cost of risk.  I think decreasing the personal cost of risk increases moral hazard, leading to unwisely riskier behavior, and I think increasing the personal cost of risk decreases moral hazard, leading to wiser choices about risk.

                I think refusing to bail people out increases the personal cost of risk.

                I think you agree with that in the abstract.  But somewhere you’re not agreeing with the specific application in this case.  Since I don’t think you’re irrational, I’m guessing that somehow they won’t actually face increased personal cost of risk.

                That claim I could understand, and I think I could see where it came from (even if my business fails, I might walk away with billions, so that financially I wasn’t hurt). But my counter would be that a) most businessmen don’t want to be known as someone who ran a business into bankruptcy, and it wouldn’t be great for their future career, and b) those who made unwisely risky investments in that business also suffer, and foreknowledge that they wouldn’t be bailed out of their suffering would also incentivize them to be more wise in their risk taking (I don’t think the problem is solely the fault and responsibility of the businessmen, but of their client–average people–as well).

                That’s my position. I hope it’s clear.  And I hope you’ll try to clarify what you mean by “the underlying problem.”

                I’ll chalk this up to a desire to criticize rather than a substantive point, since it’s entirely clear in the context I’m talking about a specific type of risk-taking: the kind presumably encouraged by the existence of bailouts. Which was your argument, not mine.

                Well, chalk it up that way if you want. We’re obviously mad at each other again, but I hope we each get over it again.  But, no, I disagree that it was entirely clear which kind you meant.  When you use broad language but mean it narrowly, you have to explicitly specify the limits on what you mean if you want to be sure others understand.  But, yes, in that limited context, I’m in agreement.Report

              • Avatar Stillwater says:

                I think refusing to bail people out increases the personal cost of risk. I think you agree with that in the abstract. 

                Not only in the abstract, but in practice as well.

                But somewhere you’re not agreeing with the specific application in this case.

                I’m disagreeing that it’s sufficient to correct the underlying problem. For the reasons I said upthread.Report

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