Opportunistic Economics
posted by Frank Pasquale
Meet the new meme scientifically proving how wasteful government spending is:
[According to former Reagan advisor Martin Feldstein,] financing additional government spending by an across the board rise in all marginal tax rates would make the cost per dollar of government spending equal to $1.76. It is possible that the state can make its citizens better off by taking $1.76 to spend $1.00, if those very expensive dollar bills are spent on highly valuable public goods folks can’t coordinate to provide privately. But I reckon this kind of bona fide public good is a pretty small part of the existing budget.
The premises appear a bit suspect to me. Why is an “across the board” raise in marginal tax rates the object of inquiry? Isn’t the real policy item on the table a reversal of the Bush tax cuts of 2003, where “more than half of the tax breaks went to Americans with incomes of more than $1 million a year”?
Even pure (and “inefficient”) redistribution can increase overall welfare if we take into account the diminishing marginal utility of money. If $1.76 is being taken from a multimillionaire, he may well miss his marginal yacht-spending less than a recipient of government-funded health care will appreciate her health care. And if he was planning to consolidate existing housing stock to build a “mansion in the sky,” perhaps everyone else is better off as well. As Jonathan Rowe notes, inequality
insulates the very wealthy from the world they create for the rest of us. When people don’t have to worry about medical insurance and usurious charges on credit cards, they are not inclined to make a fuss about them. People with their own estates don’t experience the condition of the local parks.
Of course, econo-popularizers can recognize the diminishing marginal utility of money when it helps advance their policy goals. . . .
For example, Steven Landsburg seizes on the idea to advance an immigration policy that might help drive U.S. wages to subsistence levels:
Bottom line: When the immigrant crosses the border, Americans lose $3, and the immigrant gains $7. To oppose that, you’d have to count an immigrant as less than three-sevenths of an American. But wait! It’s worse than that. The $7 gain went to a $2-an-hour immigrant. The $3 loss came from $10-an-hour Americans. And we usually think of a dollar as more valuable in the hands of the desperately poor. The most conservative standard assumption is that the value of an extra dollar is inversely proportional to your income, so an extra dollar is worth five times as much to a $2-an-hour Mexican as it is to a $10-an-hour American. The immigrant’s second dollar is worth a little less, and the third a little less than that.
But somehow, when considering whether the poor deserve life support, Landsburg forgets all about the transfer possibilities, and says: “A policy of helping everyone who needs a ventilator is a policy of spending less to help the same class of people in other ways.” The case he speaks of raises difficult moral issues about end-of-life care. But there is no excuse for econo-popularizers’ general disregard for the diminishing marginal utility of money.
September 11, 2007 at 10:27 am
Posted in: Economic Analysis of Law
Print This Post
Responses (2)
BDG - September 11, 2007 at 5:03 pm
Interesting post, Frank. I suppose some economists might say that tax is the only efficient place to achieve redistribution, so that it isn’t inconsistent for them to neglect diminishing marginal utility effects when assessing non-tax policy. This, of course, does not appear to help Landsburg, who on your account is inconsistent from policy to policy.
Also, I tend to think Sanchirico has the better of the “tax only” debate. He points out that since every redistribution creates some distortions, and the deadweight losses from distortions rise more swiftly than the distortion itself, it is better to create tiny corrections everywhere than one large correction simply in tax.
Maryland Conservatarian - September 11, 2007 at 5:28 pm
“As Jonathan Rowe notes, inequality
“insulates the very wealthy from the world they create for the rest of us.”
…an excellent explanation of the influence of the likes of George Soros, John Kerry, Jay Rockefeller and Ted Kennedy.
Leave a Reply