TAX CUTS AND BUDGET DEFICITS II

My recent post on tax cuts and budget deficits concluded that evidence does not support the contention that wealth effects result from tax cuts, or that deficits have detrimental effects on interest rates as a result of wealth effects. However, when income taxes are considered, the economy will respond to differences in the timing of taxes.

Because taxes on income and capital affect the after tax marginal product of labor, and after tax return on investment, taxes vs. deficits during different periods may affect the allocation of work, production, and investment over time. A consequence of this may be that if the government cuts taxes today to stimulate the economy then in the next period when the deficit is settled, or taxes are raised, there may be a reduction in output. These opposing reactions still approximate the Ricardian Equivalence result.

It has been proposed that Ricardian Equivalence may fail if the permanent income hypothesis fails to hold across time. ( if the permanent income hypothesis holds, then a temporary increase in income- from a tax cut- would have a minimal impact on spending) If households believe that their future tax liabilities will be high in the future ( to settle a deficit) only if their incomes are high, then they may have less incentive to save a tax cut. In this case a wealth effect is created and they increase consumption. These results would then lead to the problems so often associated with tax cuts and deficits.


References:

David Romer. Advanced Macroeconomics, 2nd Edition. McGraw Hill. 2001

Barsky, Mankiw, and Zeldes. 1986. ‘Ricardian Consumers with Keynesian Propensities.’ American Economic Review 76 (Sept): 676-691

TAX CUTS AND BUDGET DEFICITS (Part 1)

While this blog focuses mainly on environmental and agricultural issues, I do occasionally discuss more general economic issues, as there are often important linkages to agricultural economics. While having lunch I recently overheard a conversation at another table regarding tax cuts. This person was discussing the benefits of tax cuts- perhaps stimulative, and the costs of deficits. A few years ago I studied these issues in depth in graduate level macroeconomics, but this inspired me to re-visit the literature.

A major concern is with deficits that may result from tax cuts. According to the traditional Ricardian Equivalence ( R.E.) result, people are indifferent to a tax cut now, and higher taxes in the future to pay for covering the resulting deficit. Tax cuts ( if saved/invested) in the current period provide enough resources to cover the deficit in the future, and provide no wealth effect.

It is the wealth effect that is the problem. If people feel wealthier from a tax cut they may spend more, this leaves less money for settling the deficit. The government has to borrow from fewer resources to cover the deficit, and upward pressure is exerted on interest rates. In the long run this leads to less investment and is detrimental to economic growth. In addition, if other countries are loaning the funds to cover the deficit ( through the purchase of government securities), then our balance of trade is affected.

Why might there be wealth effects? One reason is finite lives. People may feel that they can spend the tax cut and pass the debt on to future generations. Another reason often given for wealth effects is imperfect loan markets. People that are restrained from spending because they have little collateral or face high transaction costs in getting loans to finance spending, see the tax cut as a loan that must be paid back in the future ( via higher taxes). Only, the rate at which their future taxes will increase is less than the high interest rate they would have to pay for a loan equivalent to the tax cut ( providing that they can even get such loan). As a result, a tax cut leads to spending among this group of people.

The reasoning behind finite lives is often refuted with examples of bequests, or long-term investment vehicles that have returns based on a market that factors in future tax liabilities. The imperfect loan markets argument, if it holds, implies that deficits are good in that they would improve the functioning of loan markets. Much empirical research indicates that these mechanisms for wealth effects fail to lead to increases in interest rates.

So, when it comes to lump sum taxes at least, consumers are indifferent between tax cuts now and settling deficits in the future with higher taxes in the future. Empirical evidence does not support the contention that wealth effects result from tax cuts, or that deficits have detrimental effects on interest rates as a result of wealth effects.

i.e. we may not see much stimulus from the current stimulus package that includes a lump sum tax refund, but the resulting deficit may not be something to worry about either since there likley won't be any wealth effects.

REFERENCES:

Robert Barrow. Macroeconomics- 5th Edition MIT Press 1997

CARBON CREDITS

Recently I attended a forum on the possibility for local growers to sell agricultural carbon offsets to the Chicago Climate Exchange. Besides the possiblility of extra income, cabon credits would encourage the use of no-till, which preserves the soil structure, reduces runoff and water pollution, and improves biodiversity within the soil. Reduced tillage practices also imply a decrease in fossil fuel use ( it takes much less fuel to no-till corn than to run plows and harrows through the soil). Another environmental benefit of no till is that it favors the use of biotech crops that have superior environmental benefits. Crops resistant to glyphosate herbicide, and those that express the Bt insecticide trait are ideal in no-till situations, and require the use of fewer or no toxic chemicals.

Carbon credits represent a serious approach to climate change policy. As renowned climate economist William Nordhaus states in his review of the Stern Review on Climate Change “proposals resulting in increased fuel efficiency for cars, requiring high efficiency light bulbs, subsidizing solar and wind power ..are largely fluff.” Fuel economy standards can actually have lethal side effects. The National Academy of Sciences 2001 report on CAFE standards estimates that the lethal impact of CAFE related changes in automobile designs resulted in the loss of 1300-2600 lives per year.

Carbon credits effectivly put a price on carbon, which sends a signal to consumers about their ‘carbon footprint.’ Higher carbon prices would provide the incentives for the type of technological change necessary for dealing with climate change.

BIOTECHNOLOGY: CONVERSATIONS WITH FARMERS

The following link will take you to a video- commentary from scientists and poor subsitance farmers in developing countries.


http://www.monsanto.com/biotech-gmo/asp/default.asp

© 2007 Monsanto Company. All rights reserved. The copyright holder consents to the use of this material and the images in the published context only and solely for the purpose of promoting the benefits of agricultural biotechnology.

I know this is a corporate sponsored site, so critics will have their biases, but I think the testimonials speak for themselves. If ever there were a consensus about global warming, the scientific consensus about the improved safety and benefits of biotech crops more than corroborates the positions held in this video.

While politicians are making political hay with a potential global warming crisis, ( with warnings about food shortages, droughts, etc.) there is very little press about the role biotechnology can play in dealing with not only future changes in climate, but the billion people in the world today living on less than a dollar a day.

GLOBAL WARMING POLICY APPROACHES

Carbon taxes are the method preferred by many economists with regard to combating climate change. The other alternative would be a Kyoto style cap and trade system. Both methods can be structured to capture the value of the estimated externality of carbon emissions ( the negative effects of climate change). I tend to favor a cap and trade system, but there are problems with market volatility, and rent seeking. (however there is still a lot of money to be made by favored businesses from regulating carbon, even with a tax).

The problem is balancing the economic costs of policy today today with the economic and ecological benefits of reduced climate change in the future. This can be approached by determining just how to value any negative externality associated with carbon ( or any greenhouse gas). This is not done easily.

This value is estimated by Nordhaus ( Using the DICE-2007 model, and based on the science of the IPCC Fourth Assessment) at about $30/ ton, with the average person in the US generating about 5tons/yr, for a total of about $150/year, or .09 /gallon of gas and .01/kwh for electricity. However, according to Nordhaus, the Stern Proposal for reducing global warming estimates the damage from global warming to be closer to $300/ton carbon for the next two decades. It would reduce the estimated damage from global warming by $13 trillion, but at a cost of $27 trillion. In this case we are looking at increasing gas with a $1.20/gallon tax.

There are also proposals to give vouchers to low income people to compensate them for the increased burden of the tax. But, one of the greatest tools for fighting poverty ( and environmental degradation in many cases) is economic growth and technological change. We should look critically at which policies provide the best science based trade-off.


Note: Nordhaus' findings can be found in his report:
The Challenge of Global Warming: Economic Models and Environmental Policy, William Nordhaus, Sterling Professor of Economics, Yale University 2007.

DEFINING CONSENSUS

If we accept the IPCC 4th Assessment Report as consensus, we get the following conclusions:

9/10 experts agree humans have net warming effect p.4

We are 66% certain human influence has been enough to affect storm patterns p.6

We are 50% certain humans have affected heatwaves and droughts p.6

We are 66% certain we will see drastic climatic events ( cyclones, storms, droughts) p.8

There is a 90% chance we will see increases in temperature extremes p.8

*Probabilities defined on p. 3 of introduction of actual report.

The U.N. Intergovernmental Panel on Climate Change's 4th assessment report (2007) predicts that the sea level may rise between 18 and 59 cm (~ 7-23 inches dividing by 2.54) by 2100 (p.13, summary for policy makers).

So, according to the major consensus view, there is still quite a bit of uncertainty about the effects of global warming, and these consequences are predicted to be much milder than “sea levels rising by more than 20 feet with the loss of the shelf ice in Greenland and Antarctica, devastating coastal areas worldwide” as depicted in ‘An Inconvenient Truth. While this may happen, the time frame is over thousands of years as opposed to the ‘consensus’ view for the next century.

What economists must do then, is take this consensus science into account, and approximate what the price of carbon should be to limit economic damages from CO2. This level will be achieved where the marginal cost of reducing carbon emissions is equal to the benefits of decreased damages from climate change in the future.

REFERNCE: http://www.ipcc.ch/ipccreports/ar4-syr.htm

EXTERNALITIES: Holes in Markets

In previous posts I’ve discussed that when resources become scarce prices rise and they are used in a way that is more sustainable. I also noted how free markets incorporate the consideration of future generations when resources are used. The conclusion is that free markets are consistent with the optimal use of resources, and the crisis mentality that calls for massive government intervention is unfounded. Many critics of this position claim that there are many ‘holes’ in markets that call for government action.

Theoretically, many holes in arguments for markets have been described as negative externalities or commons problems. An example would be the consumption of pork. In producing and consuming pork, the producer and consumer may not take into account the impact that a concentrated animal feeding operation may have on air or groundwater pollution. It would appear that in this case a negative externality exists because there is a divergence between the private and social costs of producing and consuming pork.

Whenever the cost of one’s behavior is not factored into a price by which a choice can be valued, a commons problem or negative externality exists. As Coase (1960) and Demsetz (1967) point out, with the establishment of property rights and markets (bargaining) the externality of the commons can be internalized. Behavior is changed or altered to account for the negative impact our choices impose on others. This framework, part of what is known as the Coase Theorem, closes many of the holes in arguments for free markets.

Relating to our pork example, if negative externalities exist, it is due to the fact that there are poorly designed property rights to water and air. Groups like Ducks Unlimited and the USDA have caught on to this and are using market incentives to mitigate such pollution problems. Recently the USDA implemented a Water Quality Credit/Trading program. Even the KYOTO Treaty is based loosely on this logic with CO2Cap and Trade provisions.


SOURCES:

CONSIDERING MARKET-BASED ALTERNATIVES TO IMPROVE THE MANAGEMENT OF CAFOs
Jerry R. Skees
J. Roy Black
Ben M. Gramig
American Agricultural Economics Association, 2003
http://agecon.lib.umn.edu/cgi-bin/pdf_view.pl?paperid=9164&ftype=.pdf

Towards a Theory of Property Rights.
Harold Demsetz
The American Economic Review. Volume 57, Issue 2. May, 1967

The Problem of Social Cost
R. H. Coase
Journal of Law and Economics, Vol. 3, Oct., 1960 (Oct., 1960), pp. 1-44

CONSIDERING FUTURE GENERATIONS IN RESOURCE USE

In a previous post, I mentioned that policies can be evaluated by the net benefits that they produce. Does this analysis consider the impact on future generations? How do we deal with situations in which costs are imposed on people in the future as a result of our actions today. Alternatively, how do we justify incurring costs today, for the benefit of future generations. ( both of these questions are relevant in the case of global warming).

The benefits of future generations are compared to the costs of current generations via the present value concept.

Example: If a policy implemented today (such as CO2 emissions caps) produces benefits equal to ‘x’ trillion dollars in the future, then we take the present value of ‘x’ billion dollars and compare it to the costs of the policy today. If the policy produces net benefits in present value terms then it may be a favorable pursuit.

Note, discounting future benefits back to today’s dollars does not imply that we are giving greater weight to our well being today vs. the well being of future generations. PV discounting only allows us to compare costs today with benefits tomorrow in ‘common units.’ It also recognizes that there are opportunity costs to devoting resources today to certain policy ends. ( i.e. often the appropriate discount rate used in PV analysis for public policy may be reflect the opportunity cost of capital. This is relevant because productive capital itself can have a mitigating effect on environmental problems such as global warming).

COST BENEFIT ANALYSIS AND MARKET PRICES

In most all cases, benefits and costs used to evaluate the efficiency of a policy are measured in dollar terms. Dollar prices are often used in this estimation because they reveal how people value scarce resources. This is what may be referred to as ‘use value.’ Economists also recognize ‘non-use value,’ or the value or benefit that people conceive from simply knowing that resources exist. ( ex: you may get non-use value from simply knowing that bald eagles have not become extinct etc. regardless if you ever benefit from their existence in some direct financial way.) Of course, these values are much more difficult to quantify.

Without market prices, economists often rely on survey data or data provided by the physical and natural sciences. Both revealed ‘use-value’ and approximated ‘non-use’ value are converted into monetary terms to provide a common unit of measure. This is not to say that we can put a price on everything, and this does not give greater weight to ‘markets vs. nature,’ it just provides a common unit of measure. This is no different than converting from meters to feet etc.

In the end, if total benefits translated into monetary terms exceed costs, ( the policy produces positive net benefits) then the policy is said to have a favorable cost/benefit analysis, at least from a pareto-potential perspective.

This does not mean that the policy should be undertaken, just that it may be favored over an alternative with negative net benefits. There are plenty of other criteria that must be considered such as constitutionality, distribution, rent seeking, etc. ( see ‘Public Choice’ under selected topics)

EASY MONEY OR FINANCIAL INNOVATION?

In earlier posts ( Discretionary Monetary Policy I-III) I presented a brief overview of a hybrid monetarist/Austrian view of bubbles and business cycles. This explained the bursting of the ‘agriculture bubble’ in the 70’s, the tech bubble in the 90’s, and I related it to recent sub-prime mortgage issues.

Certainly these ideas are not my own, but just my application of certain ideas from macroeconomics, and many people may disagree, or be in denial about an infallible fed. But, there are many who offer corroborating analysis. As Gerald P. O’driscoll (former vice president of the Dallas Fed) notes in his Cato Institute article ‘Our Subprime Fed,’

“ The Fed cut the fed funds rate sharply after the bursting of the stock market bubble in March 2000…..the Fed cut rates far too long, fueling not only a vigorous economic expansion but also the housing bubble.”

Wayne Angell, a former Fed governor and personal advisor to Dick Cheney is quoted in a recent Fortune article;

"The Fed was extremely easy from 2002 to 2005. It was not desirable or necessary, and it set off this huge real estate boom.”

So, the idea that easy, discretionary monetary policy by the Federal Reserve played a role in recent sub-prime mortgage troubles certainly has merit among some prominent economists.

However, one thing cautioned as far back as my undergraduate coursework in money and banking, was the role that financial innovation and technological change may play when modeling the macro economy or predicting the effects of monetary policy. In the 90’s people were touting that information technology, debit cards, ATM’s etc were changing the way we must view money. In addition, IT made workers more productive, allowing expanded economic growth for a long period of time with very low unemployment without ‘overheating’ or triggering inflation. Of course, the tech bubble soon burst after that.

In ‘The Bear Flu and How it Spread,’ a recent Business Week article explains the role of financial innovation in the collapse of two Bear Stearns hedge funds. It describes a tweaked version of collateralized debt obligations ( CDO’s) that they tagged ‘Kilo’s. They were designed to encourage money market funds to get involved in the mortgage market by having other large banks such as Citigroup and Bank of America guarantee the investments. To the money market manager, there were decreased risks, and better returns from mortgage products vs. the traditional short term investments used historically. The big banks received fees and more fund sources for ultimately securitizing their mortgages, and Bear Stearns was profiting from selling these new innovative investment products.

Of course, with this model being repeated throughout the real estate and financial sector of the economy, a downturn could create problems, and it apparently did. One question of course, is what played a larger role in the grand scheme of things, easy money or financial innovation? It is hard to know. One thing is true, the market distortions and noise created by discretionary monetary policy make it hard to determine any thing for certain.

REFERENCES:



http://www.businessweek.com/magazine/content/07_53/b4065000402886.htm

http://money.cnn.com/2007/11/22/magazines/fortune/cheney.fortune/index.htm?postversion=2007112517

http://www.cato.org/pub_display.php?pub_id=8638

WHY AGRICULTURAL ECONOMICS

"The combination of quantitative training and applied work makes agricultural economics graduates an extremely well-prepared source of employees for private industry. That's why American Express has hired over 80 agricultural economists since 1990."
- David Edwards, Vice President-International Risk Management, American Express


While in graduate school, and deciding upon the traditional course work in economic theory vs agricultural and applied economics, my advanced micro theory instructor ( from a course taken at the University of Kentucky) posed the following scenario. He said

‘ You can choose to be a consumer of economics, or you can be a producer of economics.’

Phrased differently, he was asking, at what level of mathematical abstraction do you want to work. Do you want to use mathematical tools to model and solve problems of economic significance,( a consumer of economics) or do you want to develop the mathematical tools to be used by other economists to build models and solve problems ( a producer of economics).

Perhaps it is also a question of basic vs. applied research. I want to see application and results. I want answers to questions now. I don’t want to wait 10+ years for my ideas to either catch on or be forgotten.


To quote, from Johns Hopkins University’s applied economics program home page:

“Economic analysis is no longer relegated to academicians and a small number of PhD-trained specialists. Instead, economics has become an increasingly ubiquitous as well as rapidly changing line of inquiry that requires people who are skilled in analyzing and interpreting economic data, and then using it to effect decisions ………Advances in computing and the greater availability of timely data through the Internet have created an arena which demands skilled statistical analysis, guided by economic reasoning and modeling.”

Ultimately I chose a graduate program in Agriculture with an emphasis in Agricultural Economics. I had some trepidation at first, thinking that it may have a limited focus. Actually, it lead to encounters with the same theoretical and quantitative tools presented in traditional graduate work in economics, and also provided additional opportunities for application (such as natural resource and energy economics or biotechnology). At my institution, I was able to take additional courses in crop science and genetics to tailor a secondary emphasis in Agronomy. I also had the opportunity to take courses in applied economics and finance from the MBA program.

To quote from the American Agricultural Economics Association:

“Nearly one in five jobs in the United States is in food and fiber production and distribution. Fewer than three percent of the people involved in the agricultural industries actually work on the farm. Graduates in agricultural and applied economics or agribusiness work in a variety of institutions applying their knowledge of economics and business skills related to food production, rural development and natural resources”

A SHORT ASIDE ON COST BENEFIT ANALYSIS

The ongoing theme for some of my recent posts has been tools used by economists in studying the environment. In this post I am going to discuss the concept of efficiency and methods of cost benefit analysis.

Pareto Efficiency: A state is pareto efficient if it is impossible to make someone better off without harming another. In other words, if you can only make someone better off by making someone else worse off, you should do nothing. This state of rest is ‘pareto efficient.’

Cost Benefit Analysis: Cost benefit analysis is based largely on ‘pareto –potential' efficiency. In this case the benefits of a policy must exceed the costs imposed on society to achieve those benefits. It is pareto-potential because, if the benefits generated by a policy exceed the costs, beneficiaries could theoretically or potentially compensate others who may be harmed by the policy.

In the next post, I will discuss how costs and benefits are measured, an important exercise for public policy analysis.

POLLUTION AND ECONOMIC GROWTH

If we are concerned with economic growth, we must carefully consider how pollution may affect growth. Can we quantify a critical amount of pollution that will be detrimental if no corrective measures are taken?

In many cases, environmental problems are the unintentional consequences of buying and selling goods. This typically occurs when these consequences are not captured in the price of the goods exchanged. Whenever the full cost of one’s behavior is not captured by a price by which an environmental trade-off can be valued, a negative externality or commons problem exists. ( see my public choice article- Our commons, Our Choice).

In many cases, without private property rights or markets to establish prices, economists must rely on evidence from the sciences in order to approximate the value of an externality. They may use this evidence to model the biological consequences of different policy options and the relevant costs and benefits. They use these models to approximate the dollar amount of a negative externality and attempt to tax or structure a system of property rights in such a way that the externality may be internalized. ( see the previous Public Choice post on the ‘Coase Theorem’) When this is done, and individuals are paying the full cost of their behavior which may be causing damage to the environment, an optimal solution may be achieved.

It is in this way that we capture both the positive and negative effects of economic growth for long term sustainability.

NATURAL RESOURCE ECONOMICS: DEALING WITH SCARCITY

When resources become scarce in market economies with relevant price systems, prices increase. This price increase which reflects the increase in scarcity leads to land, capital, labor, and natural resources being used in different proportions. The higher price motivates users to reduce consumption or increase the use of substitutes. It motivates producers to increase the supply of resources if possible, or to invest in technology that better utilizes resources or leads to substitutes. The result of higher prices, substitution, and technological change is that scarce resources are used more efficiently or less intensely. It is then possible for economic growth to continue in the face of diminishing or degrading of natural resources.

Drastic changes in regulations or tax policy that stifle this process could leave us without the technological means to deal with future scarcity. This is something to be considered when dealing with climate change policy.

Environmental Economics

I've just recently wrapped up a series of posts related to public choice economics. Public choice is useful because the analytical framework it provides is necessary for understanding agricultural and natural resource issues in the context of government decision making.

The next series of posts will focus on theory related to environmental economics. They will focus on how we deal with scarcity of natural resources, pollution, etc.

A SUSTAINABLE THANKSGIVING

This past Thanksgiving, Michael Maniates wrote a dismal piece in the Washington Post stating that “We need to be looking at fundamental change in our energy, transportation and agricultural systems rather than technological tweaking on the margins.” He was referring to ecological disaster that may ensue if we fail to take drastic actions today.

In the last 50 years, agricultural productivity has doubled. The average corn yield in 1960 was near 55 bushels per acre, today it is nearly 160 bushels per acre. We get about 185lbs more from every harvested cow than we did forty years ago. Technology is not only making us more productive, but also more ‘green,' addressing many of the concerns Mr. Maniates may have about ecological disaster.

1.04 million fewer pounds of insecticide are applied each year as a result of biotech Bt cotton alone. With Bt cotton, 4 million gallons of fuel and 93.7 million gallons of water are saved on the farm each year from fewer insecticide applications. Roundup Ready technology has allowed for glyphosate herbicide to substitute for 7.2 million pounds of other chemicals that are more toxic and persistent in the environment.

We’ve come a long way since the first Thanksgiving harvest. Perhaps major change will come in other areas, but in agriculture it will be the marginal tweaking of biotechnology that paves the way toward a sustainable future and provides us with tools for dealing with climate change.

References:

1)Michael Maniates “Going Green? Easy Doesn't Do It”
www.washingtonpost.com , Thursday, November 22, 2007; A37
2)NASS: http://www.nass.usda.gov:8080/QuickStats/PullData_US.jsp
3)ERS: http://www.ers.usda.gov/
4)Cattle-Fax: http://www.beefusa.org/uDocs/cattlenumbersandbeefproduction347.pdf
5)Dr. Roger Leonard, LSU Agricultural Center and Dr. Ronald Smith, Auburn University. Research in Bt Cotton
6)Farm Industry News Feb 1, 2007
7)Gregory Conko “The Benefits of Biotech” Regulation. Spring 2003.

THE REAL THANKSGIVING

Thanksgiving was not about the Pilgrims embracing diversity and thanking the Indians for helping them survive. The celebration was about thanking God for the abundance which ultimately resulted from a move away from socialism ( imposed on them by the Colony’s Sponsors) to free market capitalism.

As governor William Bradford commented on the dreadful conditions of 1622:

" . . . the young men . . . did repine that they should spend their time and strength to work for other men's wives and children without any recompense. The strong . . . had not more in division . . . than he that was weak and not able to do a quarter the other could; this was thought injustice. The aged and graver men to be ranked and equalized in labors and victuals, clothes, etc . . . thought it some indignity and disrespect unto them. And the men's wives to be commanded to do service for other men, as dressing their meat, washing their clothes, etc., they deemed it a kind of slavery, neither could many husbands well brook it."

"For this community of property (so far as it went) was found to breed much confusion and discontentment and retard much employment that would have been to their benefit and comfort . . . all being to have alike, and all to do alike . . . if it did not cut off those relations that God hath set amongst men, yet it did at least much diminish and take off the mutual respects that should be preserved amongst them."


In the Spring of 1623, they moved away from Socialism and embraced the incentives of Private Property and Capitalism:

"All their victuals were spent . . . no supply was heard of, neither knew they when they might expect any. So they began to think how they might raise as much corn as they could, and obtain a better crop than they had done, that they might not still thus languish in misery. At length . . . the Governor (with the advice of the chiefest among them) gave way that they should set corn every man for his own particular, and in that regard trust to themselves. . . . And so assigned to every family a parcel of land . . . "

"This had very good success, for it made all hands very industrious, so as much more corn was planted than otherwise would have been by any means the Governor or any other could use, and saved him a great deal of trouble, and gave far better content. The women now went willingly into the field, and took their little ones with them to set corn, which before would allege weakness and inability, whom to have compelled would have been thought great tyranny and oppression."

Thanksgiving is therefore about freedom, private property and the unrestrained ability to worship and show thanksgiving.

PUBLIC CHOICE AND THE CONSTITUTION

With all of the problems previously mentioned such as voting paradoxes and the results of the median voter theorem, democracy is not without its problems.

Our founders may not have spoke in these terms, but they did anticipate problems. Knowing that voting can be an imprecise method of determining the will of the people and government is limited in what it can do to promote the good of the society, the things that we vote for ( at the state, local, and federal levels) should be limited. Changes should come slowly, and interpretations of our laws should be consistant.

As James Madison Stated:

"It will be of little avail to the people that the laws are made by men of their own choice, if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood; if they be repealed or revised before they are promulgated, or undergo such incessant changes that no man who knows what the law is today can guess what is will be tomorrow."
-- James Madison, Federalist no. 62, February 27, 1788

By specifically enumerating the powers of government, the constitution provides a means for mitigating these circumstances. Once we abandon this concept, democracy becomes less effective. As Thomas Jefferson stated:

"I consider the foundation of the Constitution as laid on this ground that 'all powers not delegated to the United States, by the Constitution, nor prohibited by it to the states, are reserved to the states or to the people.' To take a single step beyond the boundaries thus specially drawn around the powers of Congress, is to take possession of a boundless field of power not longer susceptible of any definition."
-- Thomas Jefferson, Opinion on the Constitutionality of a National Bank, February 15, 1791

Public Choice Theory certainly provides a solid basis for limited government, and it is one that our founders would have agreed with.

PUBLIC CHOICE RECAPITULATION

Many of my recent posts have probably seemed a little more formal than my normal analysis of the biotech industry, agriculture, and natural resource issues. However, I think they highlight important tools and concepts. Because the agriculture industry and the pattern of natural resource use can be heavily influenced by government policy, it is important to be able to analyze government behavior in a way that is precise. The tools and concepts developed by public choice economists allow us to do this. To review, some of the tools/concepts that I have recently discussed include the following:

TYPE TWO ERROR BIAS - overcautious behavior, ex: FDA drug approval, response to Hurricane Katrina

VOTING PARADOXES- randomness of election outcomes

MEDIAN VOTER THEOREM- leads to exploitation of minority by majority

TRAGEDY OF THE COMMONS – lack of property rights and pollution

COASE THEOREM – symmetry of environmental pollution, internalizing effect of property rights and markets

TRAGEDY OF THE ANTICOMMONS – underuse of resources due to excessive checks on power, bureaucracy. Ex: response to hurricane Katrina

KNOWLEDGE PROBLEM- government relies on a ‘shrunken’ pool of knowledge vs. markets

By clicking the ‘Public Choice’ link below, or under the ‘Selected Topics’ sidebar you can find more detailed discussions of each of these concepts.

TRAGEDY OF THE ANTICOMMONS

In a past post I discussed the scenario described as the ‘tragedy of the commons’ which characterizes many environmental problems, especially problems of overuse and resource depletion. To review, the tragedy of the commons basically occurs when ‘individuals have unlimited access to resources in absence of well defined property rights ( Sobell and Leeson, 2006). Without property rights, there can be no transfer of rights and no market to establish a price by which environmental tradeoffs can be valued. The problem is the failure of government to define and enforce property rights.

The ‘tragedy of the anti-commons’ is another type of government failure. This occurs ‘when too many owners hold (such) rights of exclusion’ (Heller, 1998). In this case resources are subject to underuse. This can also be described as a ‘tragedy of political commons’ when too many individuals have veto power in decision making processes ( Leeson, 2006). And note, related to other posts regarding public choice theory, these individuals are acting in their own interest, face ineffective incentive structures, and likely have limited information. When they actually do make a decision, it is likely a poor one.

A prime example of the tragedy of the anticommons and resource under use is the government’s response to hurricane Katrina. Post 9-11, FEMA was placed under Homeland Security, adding an additional layer of bureaucracy to the decision making process. There were further problems at the local level. An example given in a 2006 article in the journal Public Choice describes an incident where one out of state sheriff complied with all of the necessary procedures and paper work that would enable him to direct his resources for a relief effort and was never able to help. A second sheriffs department ignored procedure and was able to bring 9 truckloads of supplies and 33 deputies to the scene.

We also see that in the private sector, where this problem is less of an issue, companies like Wal-Mart, Home Depot, and State Farm insurance were well prepared and on the scene where they were needed.

Because of the tragedy of the anticommons, resources that could have been used in the relief effort were underutilized.

References:

Government’s Response to Hurricane Katrina: A public choice analysis
Public Choice Volume 127,numbers1-2/ April 2006
Russel S. Sobel and Peter T. Leeson

Heller, M. (1998). The tragedy of the anticommons.: Property in transition from Marx to Markets. Harvard Law Review, 111 930 622-688.