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Moore’s Law and the Economics of Abundance

Moore's Law explains why the price of everything electronic keeps going down; but now Moore's Law is starting to have an effect on much more than technology prices The costs of energy, medicine, law, education, financial transactions, and government itself are falling because of Moore's Law's relentless progress. But these cost decreases are not being fully reflected in the prices we pay for all these things. Both government and private sector monopolies work hard (and sometimes together) to prevent plunging technology prices from cutting into the rents they've become accustomed to collecting.

Quick primer on Moore's law; feel free to skip this paragraph if you don't need it.

Gordon Moore, co-founder of Intel, observed that process improvements resulted the number of transistors which could be placed on a chip doubled roughly every eighteen months while the cost of making these chips stayed the same. In the real world this means that cost of computer memory and computing power comes down 50% very 18 months. For example, in 1968, I was responsible for the purchase of 256,000 bytes of memory for a mainframe; it cost $100,000 or $382 for each thousand bytes. Today on Amazon you can buy an 8 Gigabyte (8 billion bytes) memory card for $11.93. Ignoring the free reader which Amazon throws in, this comes to $0.0000015 for each thousand bytes. If you do the math, you'll find that, in this case, prices went down even faster than Moore predicted. And I've ignored inflation.

Data communications prices plummet

How much data you can transmit for a given price in a given period of time depends on how much of it can be squeezed into a copper, fiber, radio wave or other kind of pipe. The cost of data squeezing depends on the cost of the computer power which does the squeezing. So it shouldn't be any surprise that data communication costs follow Moore's law down further and further. In 1996 you paid $19.95 for the ability to send 32 kilobits (roughly 32 thousand bits) of data per second over a dial up phone line continuously, about $.61 per thousand bits per second. Today I have a $39.55 connection which lets me transmit 10 megabits (a little more than 10 million bits) per second, $.004 per thousand bits per second. This improvement, astonishing as it may be, is actually slower than Moore's law would predict.

Prices for talking also affected

Plain old phone calls within the United Sates used to be distance and time sensitive and cost up to $1.00/minute. You can pay those rates today if you make the mistake of using a telephone in an expensive hotel. Now unlimited domestic calling is part of most landline plans and, even on cell phones, doesn't cost much. Similarly international calling rates to places like China and India, which used to be priced in dollars, per minute now are priced in pennies. In a strange reversal of value, video calling on Skype from anywhere there's a broadband connection to anywhere else is free (once you pay for the computers and Internet connections). On the other hand, if you take your US cell phone abroad and call or get called from home, you're back to over a dollar per minute if you're not careful.

What's going on here? You can transmit and receive huge quantities of data on the Internet without worrying about how far it's going or whether it crosses national borders. The amount of data necessary to represent a voice call is laughably small compared to a graphic, a video, or even high definition sound. Why should this small amount of data carrying capacity be priced at such high rates?

The answer is toll booths! The old voice telephony structure consisted of national monopolies – some owned by government, some government sanctioned. These monopolies became enormously profitable for their owners; the value of voice communication is high so high tolls could be charged. At first high tolls were fair compensation for the high cost of laying undersea cable. But the costs stayed high even as technology running at Moore's Law pace kept doubling and redoubling the amount of data which could be stuffed into a cable. Replacing cable with fiber obviously required more capital; but the capacity of the fiber was so high that capacity was no longer constrained. Volume didn't grow to fill the capacity because the national monopolies conspired with the help of their governments and a UN body called the ITU (International Telecommunication Union) to keep international calling rates high.

The Internet happened. And those of us in the nascent Voice over IP industry realized we could move data as voice over these new channels. We were more efficient than the traditional carriers at packing voice data into the fiber which made up the Internet; but, more important, we could bypass the toll booths which had been set up at national borders and the ITU rules for keeping prices high. International calling rates collapsed like a pin-pricked balloon. India and Chine fought a first to keep the high revenues their national monopolies earned (and the huge bribes paid for the right to interconnect). But both those countries realized that they were sacrificing their whole economies to protect telecom revenue and loosened up. Cheap communication has been a huge enabler of their economic booms in a global economy.

Skype video calls can be free because they don't use any of the voice infrastructure which is still under the control of the descendants of the old monopolies. Most of the landline infrastructure in the US belongs to the reconstituted heirs of Ma Bell. Governments initially allocated radio spectrum for cell phone service in a way which assured that duopolies would control most markets for cellular service – hence relatively high cell phone rates. As lobbyists know, government can be a great help in maintaining artificial scarcity and protecting monopoly rents.

How about financial transactions?

Well, the cost of trading stock has gone from dollars per hundreds of shares to fixed fees of almost nothing for trading unlimited quantities. The government did a good job of breaking up the cozy old boy networks and fixed transaction costs. Technology reduced the real cost of trading. The market worked like it should have and prices for trading plummeted. Unfortunately bankers found some other ways to collect rents, but that's another story for another day.

Back in the 1970s I was hired to write some software to move transactions electronically between banks in order to reduce the volume of checks being flown to clearing centers every night on little jets (how FedEx got its start and its name). Part of the specification was that it took one day to clear a local transaction; two days for a regional one; and three days if the transaction was inter-regional. "It's gonna cost more in programming to hold all these transactions than just clear them instantly," I said naively. "I mean electronic travel doesn't take days."

The answer was – and still is – that the banks get interest on the float – the uncleared checks. The Federal Reserve decreed that the banks keep this benefit even though the "checks" no longer existed. In doing this they also passed up the very real value of knowing quickly that there are insufficient funds to cover a transaction. Couldn't be a better example of government action to preserve rents for favored constituents.

Medicine, energy, government, education and more

I'll be writing more about costs which technology is driving down – and attempts, often successful, to keep prices high regardless. Just think, if the price of medical technology went down as fast as the price of consumer technology, a cat scan would probably cost a nickel by now!

I'll also be speaking about Moore's Law and the Economics of Abundance at the Ethan Allen Institute's Sheraton Economic Series at 7:00PM on March 30 (this Wednesday). It's free and no reservation required. Details here.

Related posts:

Moore’s Law and Medicine: Why We Should Be Spending More

Price – Splitting the Pie – Why Not Just Bill and Keep?

Governments Hate Deflation – Should We?


Increase in DC Housing Prices a Negative Indicator

The Washington, DC area was one of only two US Metropolitan Statistical Areas (MSAs) in which housing prices increased year-over-year according to the latest release of the S&P/Case-Shiller Home Price Indices. Single family home prices rose 4.1% in the capitol MSA; 1.7% in the San Diego MSA; and were down in all the rest of the 20 MSAs for which the index has data. The 20 MSA composite index is down 2.4%.

There's a problem here. Federal government as an industry is doing much, much better than the other industries which support the other regions of the country – and which support the government. This is NOT all about an increase in federal employees or even how much those employees are paid. The government industry also includes legions of lobbyists and lawyers – much better paid than bureaucrats – who swarm to the capitol to influence the growing share of the national economy controlled by Washington. For fiscal year 2010, federal spending is estimated at 25.55% of Gross National Product! This ratio hasn't been this high since fy 1946 as the country struggled out from the costs of the Second World War. This number doesn't take into account "tax-expenditures" (aka loopholes), which are every bit as much worth lobbying for as actual handouts and do just as much to distort the economy.

This isn't a short-term problem or a partisan problem; it didn't start with the Obama administration. Over the last 10 years the MSA with the highest housing appreciation is also Washington, DC – up 86%; runner ups are LA at 71% and NYC at 68%. The 20 region composite is up 42% but Detroit is DOWN 34% (10% in the last year alone).

We'll know we're on the road to national recovery when influencing government isn't the fastest way to wealth. When that happens, housing prices will go down in the capitol region (and maybe NYC if government-protected banking is phased out) and up in the places where value is actually created.

Related posts:

End Federal Wealth Insurance

Cutting the Deficit – Just Do It!

The Deficit Reduction Draft Proposal is the Stimulus Program We Need!

Rebate Ripoff

The Chevy Volt is a great example of why government incentives are a terrible way to accomplish policy goals: much of the rebate money goes to paying people for what they were going to do anyway. Another share of the rebate goes to increased margins for whoever is selling the favored product.

The Volt comes with a manufacturer's suggested retail price of $40,280 and a rebate from Uncle Sam of $7500. GM only plans to make 10,000 Volts this year; and there aren't enough of them to go around. So, naturally, dealers are marking them up – some by much more than the retail amount. One Florida dealer is asking $65,590 (see Motor Trend for details). You might be able to get one on eBay for around $48,000 – after rebate that gets you right back to list price. Hmmm….

This post isn't about the economics of the Volt or the technology. People are entitled to buy whatever they can afford and don't usually cost justify their choice of a car. I might want a Volt or a Leaf for the geeky fun of it or because I don't want to use oil products; that's my choice so long as I pay for it. But the government is insisting on paying me for what I would've done anyway.

No car dealer or manufacturer would offer a rebate on a product that is in backorder status for the foreseeable future. But that's exactly what your government is doing. Even if you believe that there is a compelling reason for the government to want us all to shift to partially electric cars, it's clear that no incentive is required to sell all 10,000 cars available this year since people are buying them at markups which counteract the incentive. In this case the rebate dollars go to dealer margin. Note deficit cutting opportunity.

Full disclosure: a few years ago, I put in some solar photovoltaic panels. I got about 10% of the price back from various state and federal programs (incentives were much lower than they are now). I knew the panels were no more economically justified – even with incentives – than our vegetable garden, which grows the world's most expensive horseradish; but I wanted to learn about them and I don't like where my money goes when I buy oil (I use electricity for geothermal heat so I am displacing oil). But I would've bought the panels even without the incentives. I got paid for what I was going to do anyway. Should I have refused the incentives? My rationalization in applying for them is that they are funded by my tax dollars so I might as well get them back.

By the way, you can also get the $7500 federal incentive if you buy a $100,000 Tesla electric car. And California will add on another $5000 for the Tesla and the Volt. California, of course, is looking for a federal bailout of the state, so we may get to pay that part of the bill as well.

Related posts:

We Can End Energy Subsidies

End Federal Wealth Insurance

Nuclear Plants Shouldn't Be Subsidized Either

Nuclear Plants Shouldn’t Be Subsidized Either

Existing nukes are among the cheapest sources of electricity we have. They don't emit CO2 or anything else (other than water vapor) into the atmosphere. There is a solvable (see below) problem with nuclear waste.

So should new nuclear plants be built? The decision should be a scientific and economic and not a political one. New nuclear plants should NOT be subsidized any more than wind turbines and solar panels should be. If safe nuclear plants can't be financed and built economically, then they shouldn't be built. There should be no federal wealth insurance for either investors in nuclear plants or those who lend money to build them.

On the cost side of the ledger, nuclear opponents and proponents of competing forms of energy should not be allowed to impose inflated regulatory costs and unpredictable delays on nuclear construction. Nor should unsubsidized wind, solar, hydro, coal, natural gas, transmission line, or pipeline projects be stalled by serial spurious lawsuits and endless intervention.

Currently subsidies are available for almost every kind of energy project. Very generally speaking, Democrats like to subsidize "renewables" and Republicans like to subsidize oil drilling and nuclear. The compromise has been to "create a level playing field" by subsidizing everything. This approach keeps the campaign funds flowing from the subsidized industries – but is the enemy of both a reasonable budget and a reasonable energy policy based on economics.

There are two major subsidies for nuclear plants: loan guarantees and limitations on liabilities.

In March of 2010 President Obama made a gesture towards Republicans by announcing federal loan guarantees for two nuclear plants planned for Georgia; the guarantees were authorized during the second Bush administration. In theory the guarantees don't cost taxpayers anything because the plant builders pay a fee to the government. But, if the fee were adequate to obtain the loans commercially, there would be no need for the government guarantee. Below from the Washington Post story:

"President Obama seized a key Republican energy initiative as his own Tuesday, promising $8.33 billion in federal loan guarantees for a pair of Georgia reactors that he said would give new life to the U.S. nuclear power industry and create a surge of high-skill jobs...

"Republicans, who have called for building as many as 100 new nuclear power plants, hailed the president's move as evidence that he has accepted their argument. Sen. Lindsey O. Graham (S.C.) called it a "good first step" that would pave the way for progress on climate and energy legislation….

"Nuclear power plants "are simply not economically competitive now, and therefore they can't be privately financed," said Peter Bradford, an adjunct professor at Vermont Law School and a former member of the Nuclear Regulatory Commission. "There are many cheaper ways to displace carbon, and there are many cheaper ways to provide for electric power supply.""

See all the bipartisanship? It's not a good thing in this case. We won't know whether Professor Bradford is right or wrong about nuclear plants being economically viable if we distort the economics and provide wealth insurance to lenders.

The Price-Anderson Nuclear Industries Indemnity Act was first passed in 1957 and last renewed in 2006 for twenty years. It sets up a $10 billion dollar industry-funded no fault insurance plan for nuclear accidents and says that any amount over $10 billion will be supplied by the federal government. The rationale is that no company would take on the unlimited liability of a nuclear plant; a single accident could easily bankrupt a plant owner. Sounds right but it's actually nonsense. Investors always face the risk that their investment will disappear; there are lots of kinds of meltdown. The corporate structure protects investors from losing any more than the amount they invested. Investors might demand a higher return without the guarantee; but that's just the economics of the business. Meanwhile the existence of this particular guarantee feeds nuclear paranoia – why should the cap be necessary unless a very big accident has a significant probability? Note also that even the existence of another unwise cap on liability did not protect BP from the full cost of the Gulf spill.

The government certainly has a regulatory role to play with respect to nuclear power and almost all large scale projects. It's more likely to provide objective oversight when it is a neutral third party and does not have a financial stake in the success of the venture. Part of the regulatory role, however, is to say yes or no in a reasonable amount of time and to have that decision be final and actionable – not a prelude to endless litigation. There ought to standard pre-approved designs for nuclear plants and a reasonable process – at industry expense – for getting a new design approved. Timely permitting alone would be a huge incentive to energy projects – without distorting the economics.

As part of its regulatory role, the government ought to allow the nuclear waste depository at Yucca Mountain, for which we've already paid a fortune, to function. The costs of the plant – other than those caused by politicking – ought to be paid, of course, by the operators of the plant who store waste there. By promising a depository and reneging, the government has left pockets of spent fuel spread around the country and perhaps accessible to terrorists. Failure to follow through on nuclear waste feeds anti-nuclear sentiment, which leads to more delay in licensing which leads to more calls for subsidies.

The first post in this series against federal wealth insurance is about subsidizing mortgages.

Other related posts:

We Can End Energy Subsidies

Government Money Drives Out Private Capital

End Federal Wealth Insurance

We need to cure a national addiction to government-guaranteed debt. Proponents of government loan guarantees for things like mortgages, nuclear power plants, college loans, and small businesses tout the worthiness of the projects that are being encouraged. IMHO, the main beneficiaries of these programs are those who get to make loans which are risk-free to the lender because the rest of us are absorbing the cost of defaults. Like TARP, federal loan guarantees are a form of wealth protection.

There is now a healthy discussion of the proper role of government in the residential mortgage market. The argument for government insurance of mortgages is that, without such insurance, banks would have to charge more because they would be taking more risk and housing would be less affordable. Sounds right but it's probably wrong.

Except during housing bubbles, people decide how much they can pay for a house by calculating the monthly payments. When the price of mortgages goes up relative to wages, the prices of houses come down (again relative to inflation) as the market brings buyers and sellers into balance. Subsidizing the mortgage rate means that the price of houses goes higher because people can afford to pay more. That makes it easy to see why realtors are in favor of mortgage insurance but not nearly as clear why the rest of us should be - except if we happen to be selling a house and not buying a new one.

A huge part of the fuel for the recent housing boom was the artificially low cost of credit caused by the twin evils of the federal reserve flooding the market with liquidity and the government trying to make housing more affordable to more Americans (sounds good, doesn't it?) by subsidizing and/or guaranteeing mortgages including, of course, the activities of Fannie Mae and Freddie Mac. Housing got more expensive, of course, as mortgages became cheaper and more available; less people could afford to buy houses to live in because prices went up faster than interest rates came down. That ratcheted up the pressure for even more government assistance (you can't make this stuff up), which was forthcoming; so housing prices went even higher – until they crashed.

Moreover, absent government intervention, the mortgage market is also competitive. When government guarantees are available, lenders like to make profit without risk (to them). They can afford to charge more for unguaranteed loans because they have the opportunity to put their money to work without risk. If no guarantees were available, lender margins and the price of unguaranteed loans would probably come down since there would be no risk-free (subsidized alternative).

So, even if you believe that government should use your tax dollars to weigh in on the decision of whether you ought to use the rest of your money to buy a house or a car or nothing at all, in the end subsidizing and guaranteeing loans only makes houses more expensive. Now, if your loan is not guaranteed and your neighbor's loan is, you ARE at a disadvantage. When people think of losing the mortgage subsidy; they think that they'll still have to pay just as much for a house and more for a loan; this logic makes the politics of getting rid of subsidies difficult. Some politician has to be brave and articulate enough to explain that, if all the subsidies go away, the total cost of housing will stay the same (or go down because speculation won't be subsidized). It may help politically that we have the horrible examples of Freddie Mac and Fannie Mae and that we can't afford the subsidies; but look for plenty of arguments – some sincere – about how Americans will be shut out of the housing market or how the housing market will collapse (can't both be true at once) if lenders are not subsidized and protected from risk.

A post on federal wealth gurantees for lenders to and investors in nucler plants is here. More on other forms of federal wealth protection coming up.

Related posts:

Election Analysis: It Was TARP that Boiled the Tea

We’ve Been T*RPed

Government Money Drives Out Private Capital

The damage that government subsidies to business do the economy is far worse than just the cost to the treasury; government money drives out private investment. Government money stifles innovation; government money destroys jobs. Government's role is to regulate; it can't do that effectively when it's a player (Chernobyl was state owned and operated nuclear plant). Government has a huge role to play as a customer; it can't play that role objectively when it is financing some of its potential suppliers.

My fellow businesspeople are no more immune to the lure of free money than anyone else. Nor are businesspeople averse to returning some of their "free" government money as campaign contributions when the time comes to keep the spigot open. It's frightening when even a left-leaning president like Barak Obama is a sudden convert to "industrial policy" – meaning government subsidies to business – and appoints a commission of businesspeople to figure out how to distribute the largesse. It's scary that Vermont, under both Republican and Democratic administrations, continues targeted subsidies to businesses despite the fact that the state economists, when asked to measure the results of these subsidies in terms of jobs or incomes, essentially threw up their hands and declared the measurement impossible.

Once government money is announced as available for a particular purpose, private money dries up. Who wants to invest in a company if its competitor is likely to get free money and an unfair advantage? What company CEO wants to pay interest or dividends if she or he can just get some government largesse? Yes, private money sometimes comes in AFTER the government money – but that is an investment in demonstrated grant-grubbing capability rather than in the other aspects of the business. And that private money slavishly follows the government investment, so we don't get the creative chaos and diversity of pure private investment.

Diversity is crucial in investment and it doesn't happen when government is the investor. Government won't deliberately invest in two companies, only one of which can survive; but private investors acting separately will bring an arena full of competitors to a marketplace. It's not that private investors individually are infallible; almost all investments in innovative startups result in losses. But individual investors swarm all over the landscape in search of breakthroughs; sometimes they find them. The results in our generation are companies like Microsoft, Intel, Google, Apple, and Facebook. Government choices are invariably driven by political correctness if not just plain politics.

There is huge angst over Massachusetts' subsidies to Evergreen Solar which just moved all of its manufacturing to China. The conclusion seems to be that government didn't invest enough to counteract Chinese subsidies to its solar manufacturers; even greater subsidies are needed! What actually happened, according to a NYTimes story, is that that price of solar panels plummeted as recession-hit governments around the world reduced the subsidies for the installation of solar panels. China and other governments had subsidized too much manufacturing capacity for the now limited demand. The Massachusetts plant had 800 factory jobs; all of these jobs, of course, were announced with great fanfare just a little over two years ago. But the new plant in China is almost completely automated; it's not just the Chinese labor is cheaper; it's that a lot less labor is going into making the panels in China.

"Jobs created" is often a well-meaning criterion for government investment. A private investor would have looked at how FEW jobs were needed to create the panels and only invested if the answer was small enough to be competitive. A private investor might have suffered a loss also; but the loss wouldn't have come at the expense of taxpayers.

A private investor might have asked what Is China not doing well? Where is the opportunity? Government was seduced by the promise of "green" jobs. Now the money is gone and so are the jobs.

Despite government "help", Americans continue to innovate – mainly in those areas where no government help is available. An interesting recent example is the commercialization of new drilling techniques for natural gas, which have the promise of giving America a significant low cost path to both greater energy independence and less carbon dioxide emissions. BTW, jobs drilling for natural gas in the US aren't going to China. Although there are subsidies for extractive industries (which we could do without), there were not government programs to develop these new technologies – just businesspeople trying to make buck. In fact, parts of the natural gas industry are hurt by the resulting lower prices; that's the way business goes.

Meanwhile government was "investing" in corny ethanol. Government mandates and subsidies have diverted a huge fraction of US farmland to corn for ethanol, driven up food prices worldwide, and made very little practical difference in either energy independence or reduction of CO2 emissions because of the energy inefficiency of producing ethanol from corn. Even Al Gore, an early and crucial supporter of ethanol subsidies, has changed his position and admitted his support had more to do with presidential politics than energy policy; he now opposes further subsidies. Unwinding these subsidies will be incredibly difficult since they've resulted in over-pricing of farmland and excess production. The point isn't that this particular investment was bad; that happens all the time with private investment. The point is that government invests politically at the expense of the real economy.

Barak Obama can become the most successful "pro-jobs" presidents in recent history if he concentrates on removing existing government subsidies for business – which often become the excuse for still more subsidies to other businesses. Strangely, his allies in eliminating subsidies may be the tea-party backed new legislators who are not yet in the pocket of businesses looking for handouts. It is morally as well as economically unacceptable to continue government subsidies to business while cutting back on public assistance programs. Private capital, which is being hoarded and/or invested in other parts of the world, will stay in the US (and flow into the US), if we don't insist on crowding it out with government subsidies.

Related posts:

Natural Gas Disrupts the Energy Industry

And Here Comes the Pork

Socialist Senator Sanders Saves Capitalism

Confessions of a Stimulator

Confessions of a Stimulator – Jobs Don’t Count

""To dig holes in the ground," paid for out of savings, will increase, not only employment, but the real national dividend of useful goods and services," wrote John Maynard Keynes in The General Theory of Employment, Interest, and Money. Of course, since Keynes was an economist, there was an on-the-other-hand: "It is not reasonable, however, that a sensible community should be content to remain dependent on such fortuitous and often wasteful mitigations when once we understand the influences upon which effective demand depends."

Unfortunately, much of the economic rationale for the two-thirds of the Stimulus Bill which did not consist of tax cuts seems to have been based on Keynes' first sentence minus the part about "paid for out of savings" – Stimulus (aka The American Recovery and Reinvestment Act or ARRA) was financed by increasing the national debt. Trouble is that, if you borrow money to hire people to dig holes in the ground (and presumably to fill them up again), all that you're left with is disturbed dirt and debt, not a "real national dividend of goods and services" as Keynes claims. When you spend government money – just like private money – you need to concentrate on value created, not the number of people employed. Ultimately greater economic value leads to a more robust economy and more jobs. In the short term, debt-financed jobs which don't create value damage the economy and reduce future employment.

In a laudable attempt to make the government accountable for the results of its expenditures, Stimulus law and regulation called for counting jobs "created or preserved". Many people assumed that a "job" was something at least semi-permanent such as what you get when a new factory opens nearby. In fact, Stimulus had several definitions for jobs, but this wasn't one of them. All were measures of short-term employment. You can read more about the many ways to measure jobs and my attempts to explain them to Vermonters in How Many Jobs Were Stimulated?, which I originally published on my state blog while I was Vermont's Chief Recovery Officer responsible for reporting this data to the feds and explaining it to our citizens.

Measurement is an important part of management. It's true that you get the results you measure and reward. We weren't asked to count the jobs that were lost as businesses waited to see whether they or their competitors would get "free" government money, nor could we have done that measurement if we tried. We weren't asked to count permanent jobs, nor could we have. We weren't asked to measure the impact that the dollars we spent today would have on jobs available tomorrow. We weren't asked to measure the value of service received by the public for the dollars we spent. We didn't measure the effect of paying people not to work. We were measured against other states in how many "jobs were created or retained"; and there was some debate over whether a high number of jobs per million dollars meant that were doing well or badly – after all, if you create a lot of jobs per dollar, it may be because those jobs pay less well than jobs created or retained by other states.

Stimulus didn't literally hire people to dig holes and then fill them up again, but much of the money was aimed at preserving public-sector jobs and salaries. The intellectual rationalization for this way laid out in an Obama Transition Document which is cited and summarized in a May, 2009 report from the President's Council of Economic Advisers. This table of assumptions from the report tells much of the story:

Let's forget the absurdity of treating all spending in a category as equivalent and just subject these numbers to a thought experiment. If they are literally true, we can get down to zero unemployment by just having the government hire anyone who needs a job and raising taxes by whatever amount is required. Assuming no government overhead (yeah, sure), increasing taxes by the $92,136 required to fund government spending to create one job will only raise taxes enough to cost about two-thirds of a job somewhere else. We just keep doing that and everybody lives happily ever after. Socialists do believe that works; history doesn't support their view (just ask the Chinese).

By concentrating on counting "jobs" rather than what those jobs provided or created, we got short-term jobs we could count (those funded directly by government) at the expense of other jobs which may actually have been lost because of Stimulus and at the expense of building value for taxpayers. On the other hand, we probably got better value from Stimulus than from TARP, which concentrated on saving bankers' jobs and salaries and was accountable to no one.

There is a role for government spending in the economy – obviously. There is even a role for counter-cyclical spending. More on what could be in future posts in this series which begins with Confessions of a Stimulator.

Related post:

How Many Jobs Were Stimulated?

My Confessions in the Wall Street Journal – and the Snow

Picture piles of soggy copies of the The Wall Street Journal lying in the snow in New York and Boston. In those soggy piles is my op-ed titled "Confessions of a State Stimulus Czar". But, fortunately, there is also an online edition of the Journal; there, albeit behind the pay wall, is my article. You do need an online Journal subscription to read it; or you can read an earlier version (before extensive editing by the WSJ), on Fractals of Change at Confessions of a Stimulator (I like my title better but their edits improved the post).

The article got into the Journal thanks to persistent advocacy by Geoffrey Norman, editor of vermonttiger.com, where many of my posts run. If you like my posts, you'll probably also enjoy the posts of other Tiger writers as well.

As a consequence of the op-ed, WBT, a radio station in Charlotte, NC, interviewed me on the air this morning. You can listen to that interview by linking to http://site.wbt.com/podcasts/player/wbt.cfm?ID=2 and clicking on the 9AM, Monday, December 27 podcast.

Having had the privilege of being Vermont's Stimulus Czar, it's my intent to keep writing –and talking - about what I learned. These were valuable lessons in what government can and can't do – and how badly-aimed government efforts can produce the opposite consequences from those intended.

Next post in the series:

Confessions of a Stimulator – Jobs Don’t Count

Good Ideas for Vermont Tax Reform

Lower tax rates spread across a larger base are generally a better way to collect taxes than targeting higher rates at a smaller base. This is one of the principles that has been guiding the work of the Vermont Blue Ribbon Tax Structure Commission chartered by the Vermont legislature. The three members of the commission are Bill Sayre, Bill Schubart, and Kathy Hoyt, appointed respectively by Governor Jim Douglas, Speaker Shap Smith, and Senate President Pro Tem Peter Shumlin.

Although the commission has not yet taken a final vote on its recommendations, a majority of the members are reportedly (see Nancy Remsen's story in the Burlington Free Press) leaning towards recommending that Vermont lower its income tax rates and do away with tax deductions. The technical way that this is done is by basing tax rates on adjusted gross income (AGI) rather than taxable income, which is income after deductions. This is not a plan for either increasing or decreasing the amount collected; it is a plan for making taxes both simpler and fairer. IMHO it is also a plan for reducing government intrusion in individual economic decisions – something which should appeal to conservatives of a libertarian bent.

Under one of the scenarios considered by the commission, Vermont's top tax rate could be reduced from 8.95% to 6.96%. Rates for other brackets would be lowered as well; in general, this doesn't change the progressivity of our taxes. The new top rate would be comparable to Connecticut's 6.5% and Rhode Island's 5.99%; both of these states base their taxes on AGI as do all New England States beside Vermont and New York.

Lowering the top or headline rate makes Vermont more competitive even though it may not reduce the amount of taxes a taxpayer in the top bracket actually pays. National surveys of tax rates often leave out whether the base is AGI or taxable income so Vermont tax rates look even higher than they actually are compared to other states.

Those who benefit from specific deductions in the tax code are, understandably, opposed to the deductions being eliminated. Realtors, in general, favor a home mortgage deduction. Charities are concerned that their contributions will fall if they are not tax deductible. Accountants benefit from complexity in general. But is it really the role of government to tell us that we ought to buy rather than rent? Why should a donation to a charity escape tax but money spent to support your mother in a nursing home be taxed? Most important, why should government be putting a thumb on the scales of how we spend our own money and redistribute our money by taxing income spent on unfavored activities at a higher rate in order to finance a deduction for favored activities?

Although this proposal is designed to be revenue neutral, it is very possible that it will collect more money with less cost to the taxpayers.

Q. How is that possible?

A. Contortions to earn deductions actually cost taxpayers money even though that money doesn't end up going to government. Obviously, lawyers and accountants have to be paid. In a more subtle example, wealthy people take out bigger mortgages than they need to shelter income through the mortgage income deduction. In effect, they split the tax savings with a bank. If there is no tax incentive for the mortgage, the state and the taxpayer can both end up with more money and the bank gets less. Lower tax rates mean fewer contortions to avoid taxes.

We won't fully have the nirvana of simpler taxes until the federal system is reformed as well. But that's a possibility. The suggestions of the National Deficit Commission go even further in this direction than those of their Vermont counterparts (there are areas where Vermont shouldn't go it alone). Tax reform and simplification is not a partisan issue at either the state or the national level.

Although comments here are always welcome, comments directly to the Vermont Blue Ribbon Commission (follow this link), at least by Vermonters, are likely to be more effective. A schedule of their planned public hearings is here; the January schedule is not posted yet. The commission is also considering sales and property taxes so watch their website (and this blog) for more on those.

Related post:

The Deficit Reduction Draft Proposal is the Stimulus Program We Need!

The Good News in the Job Numbers

The US economy is working its way to employment health. Since last November private sector non-farm payrolls have climbed by over a million jobs. Part of the reason this growth hasn't brought the overall unemployment rate down as much as we'd all like to see is that government employment has FALLEN by almost a quarter of a million jobs during the same period. But, since government employment grew too quickly during the halcyon bubble years, this readjustment is a good thing. From November of 2009 to November of 2010, the ratio of government to private-sector employees has declined from 21.3% to 20.9%. There are now less government jobs for each private sector jobs to support or, looked at another way, there are more private sector jobs supporting each government job. Either way it's good economic news.

The charts above (all for November of their respective years and NOT seasonally-adjusted) are evidence for the fact that government grows to fit the revenues available. From 2003 through 2007 both private and government employment grew. Because of fast growth in the private sector, the ratio of government to private workers actually declined slightly during that time. But, with hindsight, we should have been asking "why is the size of government increasing at all?"

In 2008, as the bubble burst, private employment fell off a cliff; but government kept adding workers. The ratio of government to private jobs shot up from 19.6% to 20.4%. In 2009, thanks to stimulus, government jobs only decreased slightly while private sector jobs continued a precipitous decline. With the end of most stimulus in sight, local government employment has decreased by 260,000 since last November; but there are 10,000 new jobs in state government and 6,000 new jobs in the federal government.

We can expect to see the decline in local jobs continue as the remaining stimulus money dries up. Nationally, there is very likely to be a decline in state jobs as Mounting State Debts Stoke Fears of a Looming Crisis in today's New York Times makes painfully clear. State government employment in Vermont IS down almost 10% in the last few years and Vermont is not one of the troubled states listed in the Times story and has one of the lowest unemployment rates in the nation (too much other data to argue cause and effect, however).

We need to see a decline in federal jobs over the years ahead to bring the size of the federal government down to a size we need and can afford; Obama's deficit commission has recommended a 10% cut.

Liberal economists like Paul Krugman argue that, in order to recover from the recession, we need the spending by government employees who might be laid off. Of course you could make that argument about any expenditure of government money or any job, productive or not; but the argument ignores the cost to the private economy of supporting a bloated government sector. All things being equal as economists like to say, total employment would have gone up more quickly if there hadn't been a shrinkage in government employment – but that assumes that the private sector would've recovered even the little it has if the weight of government kept increasing.

There aren't as many private sector jobs as there were in 2003 (and that was a bad year). There are more people in the country than there were then. There isn't any reason to think things will "recover" to the peak of the last bubble – at least until the next bubble. But we are adding jobs where they're needed most. Government is not a sustainable growth industry. The latest economic news is more good than bad.

All data is from the Bureau of Labor Statistics dataset generator.

Related posts:

The Deficit Reduction Draft Proposal is the Stimulus Program We Need!

Confessions of a Stimulator

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