James Landrith is...Taking The Gloves Off: syndicated

libertarian blogger, publisher, USMC veteran and activist

 

The Leaky Bucket 
September 5, 2008
Edgar K. Browning

It is commonplace among economists to emphasize that helping the poor with government welfare programs involves a trade-off: we get greater equality (or equity), but we sacrifice some economic efficiency. How to quantify this trade-off in a way meaningful for non-economists has always been a challenge, but the late economist Arthur Okun introduced a popular metaphor that helps clarify the role of efficiency in evaluating welfare programs.

When income is redistributed from rich to poor, Okun suggested imagining that “. . . the money must be carried from the rich to the poor in a leaky bucket. Some of it will simply disappear in transit, so the poor will not receive all the money that is taken from the rich.” Money does not literally disappear, of course, but inefficiencies produce results that can often be accurately characterized in this way. When there is no inefficiency, there is no leak in the bucket, and a dollar less for the rich means a dollar more for the poor. With inefficient policies, the bucket leaks, and the size of the leakage measures the magnitude of the inefficiency. 

So, exactly how porous is the leaky bucket? When Okun wrote (1975), he thought the leakages were small, but today economists believe they are significantly larger than he supposed. Although there are too many variables to give a precise figure, we can get a rough idea that is consistent with the research literature by following a dollar on its journey from taxpayers to low-income recipients.

When the government acquires a dollar from taxpayers, it imposes a cost of greater than a dollar on them due to the inefficiencies produced by the tax policy. According to the President’s Council of Economic Advisers, taxpayers bear a cost of approximately $1.50 when the government collects a dollar in tax revenue.  Of this fifty cent additional cost, ten cents is due to taxpayer compliance costs (record keeping, time spent filling out tax forms, etc.) and the remainder is attributable to distortions in economic behavior (effects on work, saving, and spending).

Armed with a dollar from taxpayers, the government spends it on a welfare program. The administrative cost of welfare programs absorbs part of this dollar, probably about ten cents on average. Thus, ninety cents worth of resources actually goes to recipients.

But recipients of welfare do not receive benefits they value at ninety cents because of the inefficiencies produced by welfare programs. Welfare programs undermine work incentives, affect living arrangements, and distort consumption decisions. The overall size of this leakage is less well established in the research literature than on the tax side of the transaction, but I estimate that a ninety-cent welfare benefit is worth only about sixty cents to recipients—a leakage of thirty cents.

One more leakage borne by low-income recipients of welfare is their compliance costs—providing evidence that they qualify for welfare benefits. I do not know of evidence regarding how large these costs are but will just assume that they are ten cents, the same as for taxpayers.

Thus, a transfer that places a cost of $1.50 on taxpayers provides a benefit worth fifty cents to recipients. In terms of the leaky bucket, two-thirds of the contents have leaked out due to the inefficiencies in the tax and transfer programs. We cannot provide a dollar in benefits to the poor at a cost of a dollar to the well off. Instead, taxpayers bear a three-dollar cost for each dollar of benefit to the poor.

Actually, this is likely to understate the size of the relevant leakage because the estimates are based on how the policies affect taxpayers and recipients at one specific time. But people do not stay in the same income classes over time—those who receive welfare benefits this year may be taxpayers next year. A recent Treasury study, for example, finds that more than half of the households in the poorest fifth of the population (likely to be receiving welfare) in 1996 were in a higher income class only nine years later (and likely to be paying taxes). What obviously matters is how the tax and transfer system affects people over their lifetimes, not just in one year.

To see why this means that the lifetime leakage will be greater than two-thirds, consider a scenario in which person A spends four years with a low income (receiving a fifty cent benefit) and one year with a high income (bearing a $1.50 cost), whereas person B has a high income for four years and a low income for one year. Person A has a significantly lower average income over the five-year period, but the 67 percent annual leak in the transfer bucket implies that A gains only fifty cents for the five-year period as a whole, while person B loses $5.50. When the leaky bucket is evaluated for the five-year period as a whole, more than 90 percent of the bucket has leaked out.

Recognizing that government policies other than welfare programs often harm the poor (such as the way immigration policy depresses wage rates for unskilled workers and ethanol subsidies increase food costs) makes it entirely possible that the welfare state as a whole ends up hurting those it is trying to help.

Each year high-income Americans transfer more than a trillion dollars to low-income Americans through a bewildering array of policies. The leaky bucket helps explain why the results have been disappointing. We should consider the possibility that the redistributive bucket is actually a sieve before we embark on a further expansion in welfare state policies.

Crime and Drug Policy 
September 5, 2008
Art Carden

The United States imprisons almost one in one hundred American adults—a higher number and percentage of its population than any other country, according to a February 29, 2008 Washington Post article. This has been especially devastating for minorities—as the Post points out, “(o)ne in nine black men ages 20 to 34 is behind bars.” Many of these people remain in a continual pattern of crime. Are we a safer society as a result, or should we re-evaluate our crime policies?

When I was in college, Johnnie Cochran gave a talk in which he asked whether we are doing a service to the country by building a land of barbed wire and concrete “from sea to shining sea.” There is a psychological and social effect that has been pointed out by Ayn Rand, who argued (astutely) that social control is easier if we create a nation of criminals. Many statutes do not prevent crimes; they create them. Drug laws are a perfect example: drug use infringes on no one’s rights; it is the essence of a “victimless crime.”

Some might respond that there is no such thing as a “victimless crime” because of the effects of drug use on the user’s friends and families. These costs are all too real as the legacy of families torn apart by drug abuse suggests. If we are going to adopt this utilitarian line of reasoning, though, then we have to weigh the costs to families against the social costs created by the unintended consequences of the war on drugs.

The drug war is an integral part of the rapidly growing American prison population. Outlawing marijuana, cocaine, heroin, and other drugs created a whole new class of crimes and moved traffic in psychoactive drugs out of the legitimate marketplace and into the black market.

Another one of the unintended consequences of the drug war is the escalating potency of the drugs people use today. The marijuana on the streets today is much more potent than the marijuana that was on the streets thirty and forty years ago. As penalties have changed, so too have the drugs people use. Cocaine became more prevalent after the government cracked down on heroin in the 1970s. The crack epidemic was in part a response to attempts to eradicate cocaine, and the crystal meth epidemic of the last decade has happened in part in response to the war on crack. Criminal penalties give people incentives to pack as much potency into as small a space as possible; therefore, drug dealers have incentives to increase the potency of the drugs they deal.

Yet other examples of the unintended consequence of the drug war are the extremely low quality of the drugs that appear on the street and the violent means that drug dealers use to settle disputes. Someone who buys bad aspirin has legal recourse against the company that sold it to him. Someone who buys bad heroin or bad crack has no such legal recourse, and disputes over quality will be settled violently, if at all. Epidemics of urban crime are among the unintended consequences of the drug war.

It appears that we learned nothing from our experiment with alcohol prohibition in the first part of the twentieth century. When alcohol was outlawed, alcohol production and distribution were taken over by organized criminal syndicates—think Al Capone—and crime skyrocketed.

Prison is not the answer. In a recent set of lectures given on behalf of the Institute for Humane Studies, Georgetown University legal scholar John Hasnas argued in favor of restitution as opposed to incarceration and statutory law. Hasnas argued that people are not necessarily reformed while in prisons and jails. They learn to be better criminals. They attach themselves to larger criminal networks. After some of the horrible experiences of prison—like prison rape, for example—still others are likely to become even more withdrawn and antisocial. The current system isn’t working.

Proponents of law and order might see this as bleeding-heart, soft-on-crime liberalism. I agree that crime should be punished; indeed, a strong legal system is essential for a well-functioning society. To take one example, it has been argued by legal scholar Richard Posner (and I agree) that the penalties for drunken driving are not nearly severe enough. It is quite another matter, however, to argue that our current system is doing what it was meant to do. It is time to re-examine our drug policy.

The Peasants’ Oil 
September 3, 2008
Alvaro Vargas Llosa

WASHINGTON—Little international attention has been paid to the recent conflict between the Peruvian government and thousands of indigenous people in the oil-rich Amazon region over President Alan Garcia's attempt to make it easier for tribal communities to sell their land. The issue contains lessons for the entire continent—in which the tension between modernity and tradition is a recurring source of strife.

In May and June of this year, the Peruvian government passed two decrees that reduced the consent necessary for peasant communities, including tribes, to sell their land from a two-thirds majority vote to half of the participants in an open assembly. The norms, aimed at native communities all over the country, triggered a monumental rebellion in the Amazon jungle, an area rich in hydrocarbons that has largely been earmarked for oil and gas exploration and where about 300,000 indigenous people live in abject poverty.

Under pressure from nongovernmental organizations and leaders of indigenous movements, the Peruvian Congress repealed the decrees, but the government is trying to rescue part of its proposal through some form of negotiation.

The authorities argue that changing the protectionist laws would lead to a modernization of some of the poorest parts of the country through massive private investment. Critics argue that the natives would be easily manipulated by big companies whose energy projects would devastate the environment and the inhabitants of the rainforest.

The political confrontation has obfuscated the real problem, which is one concerning property rights as they affect the subsoil. As in other parts of Latin America, the Peruvian government has long claimed ownership of the subsoil. The implication is that, unlike in the United States, for instance, if a person, a family or a community holds a title over a piece of land, they do not own what is underneath it.

Those competing claims are a recipe for disaster. Every time a government wants to encourage economic development by inviting foreign and local mining or energy companies to invest in a project, the residents in or around the relevant area feel threatened. Since the only way for them to protest effectively is to rally behind the politicians and pressure groups that speak in their name, the residents, most often peasants, all too often flock behind people who are interested in their own socialist notions of development or their own careers.

The government's ownership of the subsoil is founded on centuries-old laws that, according to Enrique Ghersi, a Peruvian scholar who argues for the end of the state's ownership of the subsoil, have been grossly misinterpreted. Universal principles of ownership that go back to Roman law recognize that people who have a title to real estate extend their dominion below the surface.

In the case of the Peruvian conflict, another issue of principle is at stake. The norms that currently require a two-thirds majority vote for a community to sell the land are a collectivist imposition whose ancestral roots are extremely doubtful. While they do go back to colonial times, when under pressure from the Catholic Church the Spanish Crown sought to protect the native population from the private abuses of Iberian colonists, the legal arrangements were compounded in modern times by socialist experiments that impeded the development of native Peruvians.

The indigenous leaders who invoke "tradition" to keep the two-thirds majority vote are, of course, terrified of letting their own people choose freely. In that respect, Garcia is right to want to allow for more freedom of choice for the members of native communities. But because the government owns the subsoil, what should be a dispute between peasants wanting to exercise individual rights and community leaders standing in their way has become a fight for the survival of the indigenous people against a government willing to let Big Oil usurp their turf.

If the peasants owned the subsoil and its resources, one can only imagine the rebellion that would take place in many of the communities of the Andes and of the Amazon basin against the leaders of organizations such as the Inter-Ethnic Association for the Development of the Peruvian Forest, who have been at the forefront of the recent battle against the authorities. How would they tell a peasant sitting on billions of dollars worth of oil or gas, and willing to either sell, partner with or give a concession to a private investor, that "tradition" requires him to stay miserably poor?

U.S. Dependence on Foreign Oil: Why We Shouldn’t Be Alarmed 
September 1, 2008
Ivan Eland

Politicians regularly turn public fear into votes. President Bush proved a master at this in his 2004 re-election success. Most presidents who don’t win the popular vote the first time don’t get a second term, but fear pushed Bush over the top in 2004.

In the 2008 election, oil prices are high and the presidential candidates from both parties are trying to get into the White House by fear mongering about U.S. dependence on foreign oil. Barack Obama and John McCain both seem to think such dependence is a bad thing, and the American public wholeheartedly agrees. Because almost everyone concurs (except many economists) on this questionable proposition, the debate on high oil prices and what to do about them degenerates from there.

The facts are that oil prices are high by historical standards (although at this writing, they have declined somewhat from their peak and the media has provided less coverage of this downward slide than it did of their upward movement) and the United States imports about two-thirds of the crude oil that it consumes.

In the globalized world, however, the United States is heavily dependent on imports for many important necessities and products—for example, semiconductors. International trade allows U.S. companies and the American public to take advantage of the world market to get better goods at cheaper prices. Thus, when politicians generate fear of U.S. dependence on foreign oil, they are implicitly alleging that oil is somehow special. Oil is heavily used in transportation and the manufacture of such industrial items as petrochemicals and plastics. Yet to use the example of semiconductors mentioned above, imported semiconductors also are key component parts of important items throughout the economy—for example, computers, television sets, other electronic devices, cars, etc. Therefore, the politicians are not only implying that oil is special, but that it is also “strategic.”

Oil is strategic, however, only in the narrow sense that its derivatives help run tanks, aircraft, ships, helicopters, and other vehicles that the U.S. military would use in a war. (Of course, so do semiconductors.) But the United States produces about 1.8 billion barrels of oil annually, almost 13 times what the U.S. military used at the height of its consumption during the latest simultaneous wars in Iraq and Afghanistan (144 million barrels per year). Thus, there is plenty of domestically produced oil to run the U.S. military in times of war.

With the probability of any worldwide conventional war among great powers escalating into a global thermonuclear holocaust being quite high—in which case nobody would be caring about the vaporized imported oil—such a widespread conventional conflict is very unlikely. Thus, in any regional war, the U.S. economy would be able to get oil from the regions of the world not involved in the conflict. The price might go up because of the war, but industrial economies are actually quite resilient to oil price increases. For example, the U.S. economy has not collapsed in the wake of recent record oil prices, and from late 1998 to late 2000, Germany maintained respectable economic growth rates in the face of a 211 percent price increase in oil.

But what if the war occurred in the volatile Persian Gulf region? The United States only gets 21 percent of its oil from the Persian Gulf. Most of it comes from Canada, Mexico, Nigeria, and Venezuela. Of course, a war anywhere in the world will cause the price of oil to go up. But about 80 percent of U.S. semiconductor imports come from East Asia, yet the media doesn’t constantly run hysterical stories on price spikes in semiconductors or on the horrible U.S. dependence on East Asian semiconductors. And the politicians don’t talk about using the U.S. military to safeguard such supplies from East Asia.

But can’t the world run out of oil, especially with developing nations, such as China and India, using more? Theoretically, the answer is yes because there are only finite deposits in the earth. Yet because exploration and recovery technology is constantly improving, proven oil reserves have tended to increase over time. Also, as oil prices go up, conservation increases and alternative energy sources—natural gas, solar, geothermal, etc.--become more attractive economically. For example, the conventional wisdom was that U.S. natural gas fields were in irreversible decline, but the high price of oil has led to a drilling boom to find more of this substitute. New technology to extract natural gas from shale beds has increased production in the U.S. dramatically and will probably also do so around the world. So who knows, similar technological leaps might also increase the amount of recoverable oil around the world.

But one thing is sure: it’s a myth that being dependent on imported oil is bad. As a way to stump politicians who perpetuate this nonsense, perhaps we should ask them this question: If oil is so critical and will become even more valuable when world supplies allegedly dwindle in the future, shouldn’t we use other countries’ oil now and have the U.S. government require that our limited production be saved to use or sell as the shortages worsen and future prices go even higher? Diametrically opposed to the present time, with the prevalent fears of dependency on foreign oil, this “conservation theory” was all the rage in the late 1930s and 1940s when a slowdown in finding new oil deposits seemed to threaten chronic future shortages (similar to the dire predictions after World War I and in the early 1920s before big oil discoveries were made late in the 1920s).

Of course, this is not the right policy prescription either. We should instead treat oil as any other product and let the market provide ample supplies at the lowest cost to the consumer.

New from Ivan Eland! THE EMPIRE HAS NO CLOTHES: U.S. Foreign Policy Exposed (Updated Edition) Most Americans don’t think of their government as an empire, but in fact the United States has been steadily expanding its control of overseas territories since the turn of the twentieth century. In The Empire Has No Clothes, Ivan Eland, a leading expert on U.S. defense policy and national security, examines American military interventions around the world from the Spanish-American War to the invasion and occupation of Iraq. Learn More »»