The Libertarian Illusion

A clean and healthy environment; access to good jobs at fair wages; quality education for all; preservation and promotion of cultural goods—such as art, literature, science, and religion; and a wholesome moral climate are some of the substantive goods that may constitute the public good. From location 515

Similar logic implies regulation of business corporations to ensure that they act in a socially responsible manner. At minimum this means that they do not commit fraud or despoil the environment. Social responsibility also means treating employees well; paying fair wages; adhering to job health and safety standards; and not discriminating against minorities, women, or the disabled. From location 566

When a public school bond issue is on the ballot, the virtuous citizen asks: “Do the schools need more money to educate the community’s children?” not “Do I want to pay more taxes?” From location 630

The dominant view at mid-century was that the welfare state was a permanent improvement on the capitalist economic model in that it preserved key elements of capitalism, such as private property and a market economy, that brought overall material prosperity while ameliorating capitalism’s negative consequences, such as severe poverty and environmental degradation. From location 647

Moreover, the wealthy and powerful have found libertarian arguments helpful in altering the tax structure to serve their interests, in the process, exacerbating growing inequality in this country. Tax reduction policies favoring the wealthiest Americans since the 1980s, particularly the massive cuts enacted under President George W. Bush, have shifted onto the backs of middle- and low-income citizens the bulk of the tax burden. If libertarian proposals for further tax reform were to be adopted, the wealthy, whose income derives primarily from investment, would escape taxation altogether, leaving the burden for financing our common endeavors solely on men and women who depend on salary and wages. This marrying of libertarian ideology and the interests of the wealthy has the potential of drastically altering the American dream of a society of middle-class citizens where equality of opportunity prevails. From location 884

For Keynes, the answer to the mystery lay on the “demand side” of the economy and the psychology of business investment. To summarize Keynes’s complex analysis quite simply: the reason the high level of unemployment persisted was that with so many consumers unemployed and unable to demand new products, business owners had little incentive to invest in new production. Why employ workers to make products that were unlikely to be sold? The result was a circular, self-fulfilling prophecy where unemployment prevented the consumer demand that employers needed to expect in order to hire new workers. With declining expectations of demand, employers tended to lay off even more workers, further undermining future demand in a never-ending spiral. From location 921

Note: Quick refutation of Says Law and why market psychology allows recession and unemployment to persist.

Meanwhile, the Federal Reserve Board, under its chair, Paul Volcker, was taking a conventional Keynesian approach to reducing inflation. Appointed by President Jimmy Carter in 1978, Volcker considered the double-digit inflation of the late 1970s a greater evil than the unemployment component of stagflation. He resolved to tighten the money supply and raise interest rates to fight inflation no matter what the impact on employment. The result was a Fed-induced prolonged economic recession in 1981–1982 with record-high unemployment levels for the post–World War II period, but that did succeed in reducing inflation. Reagan’s supply-side tax cuts, then, were implemented in the midst of a deep recession, making them, ironically, the precise Keynesian medicine for stimulating economic demand. Higher military spending also stimulated demand. The result was renewed economic growth beginning in 1983 and continuing through the decade, combined with much lower inflation—the Reagan boom. In the end, traditional Keynesian-style demand stimulus, not any supply-side effect, revived the economy in the 1980s just as the earlier Keynesian-style tightening of the money supply had cooled inflation. It seems that the 1981 tax cuts did little to stimulate savings and investment as the supply-siders predicted. The proportion of personal income saved declined during the 1980s; Americans seem to have spent their tax cuts rather than used them for investment.13 Nor did the predicted supply-side effect bring in additional government revenue. Economic expansion did not make up for the loss of revenue created in the 1981 cuts. By the end of the 1980s, Reaganomics—tax cuts combined with expanded military spending—had doubled the government budget deficit as a percentage of GDP, creating the central problem budget policymakers had to face for the next ten years. From location 996

Supply-siders predicted that the Clinton tax increase would so undermine the incentive to save and invest as to destroy the economy. Despite this prediction of doom, the U.S. economy in the 1990s underwent its longest sustained economic expansion since World War II. From location 1021

Altogether, the Bush tax cuts were bigger than Reagan’s.19 The administration claimed the tax cuts would benefit average Americans, but impartial analyses of their effects show that most benefits went to the richest Americans. A 2004 study showed that individuals in the bottom 20 percent of the income distribution received only $230 on average from the tax cut, while those in the top 20 percent received an average $4,890 cut.20 The greatest beneficiaries were the super-rich, those in the top 1 percent of the income distribution earning over $1 million in annual income; they garnered an average tax cut of $40,990. Moreover, the richest 1 percent saw a 5.3 percent increase in after-tax income thanks to the tax cut, double the average increase of 80 percent of American households. From location 1043

The Bush administration justified the measure’s bias toward the wealthy, claiming it stimulated investment and promoted economic growth—the supply-side argument again. Yet this did not prove to be the case. The tax cuts failed to stimulate the economy; in fact, most Americans experienced a real decline in their household income between 2001 and 2004.21 Rather than stimulate additional growth, the tax cut brought back the structural deficit. A $236 billion budget surplus in 2000, President Clinton’s last year in office, had become a $412 billion budget deficit in 2004.22 In effect, the American people collectively, through their government, were going into debt in order to deliver a windfall to the richest Americans. Viewed from the point of view of the common good, the Bush tax cut agenda amounts to a disastrous budget policy. From location 1052

Yet the ultimate aim for these tax cuts is to eliminate taxation of all income from savings, investments, and dividends; that is, tax only labor, not capital.25 These goals are encompassed in the campaign for a flat tax. From location 1078

For government, even though it might sometimes restrict liberty, is also a necessary means for achieving tasks essential to the common good. From location 1090

All of us are susceptible to this way of thinking about income and taxes, but it is based on a mistaken understanding of the nature of income, wealth, and property in a complex capitalist society. The ability that any of us have to earn income and acquire wealth depends only partly on our own individual efforts. It relies as well on the operation of political, economic, and social institutions that make it possible for any of us to “earn a living.” The market system itself is a social construct that could not exist without the structure of laws and government policies. Anyone’s ability to earn income and own property depends on a host of laws—criminal, contract, corporate, and property—and a host of institutions required for their enforcement, police forces and judicial institutions. Beyond these, an infrastructure of transportation, regulatory, and educational institutions, many a part of government, are needed. My private college could not exist without an extensive public education system that prepares many of our students or the government grants and subsidized loans that support their tuition payments. Viewed in this light, those deductions from my paycheck can be seen as reimbursement to society for that portion of my earnings derived from social goods. This more communitarian understanding of the nature of income and wealth extends to the nature of private property itself. Libertarians tend to assume that property is a naturally occurring entity, like an acre of land I come upon and make productive. But private property is a legal convention that only exists in the context of a legal system that defines it.29 Even that acre of land I plow will be my private property only if some government gives me a title of ownership. From location 1136

Note: One of greatest passages of all time, and stands as one of the fundamental openings to Libertarian rebuttal theory 

Although any existing pattern of private property, if well established, can appear as products of the laws of nature, they are based on conventions rooted in political choices. That once, in the United States, one could hold private property in human beings proves how conventions defining private property can change. From location 1158

Note: Tell you how arbitrary the idea of property is, and that you don’t get top simply claim something.

What are the implications for the conventional character of private property for how we think about taxation? It underlines how any distribution of property and income depends on the structure of political and policy choices. The libertarians cannot claim that the distribution of income, wealth, and property ownership derives solely from the outcomes of individuals’ voluntary exchanges. That is partly the case, but they also reflect the legal system in which the market operates, including the tax system, and access to a variety of social goods.30 My pretax income, then, should not be considered something to which I am individually entitled, but as a combined product of my efforts and the operation of the overall social system. Instead of viewing taxation as taking what belongs to individuals, taxes should be evaluated in terms of the collective goals they aim to achieve. This includes both policy judgments about the division of what the economy produces between individual private control and governmental control and about the appropriate distribution of societal wealth and income. From location 1161

Note: Level 9 – while not earth shattering, it certainly would have cone in handy many times and explains very well again the fallacy of pre tax income, reminding us that any property in your hands and any capital you enjoyed got there through a nexus, a whole galaxy of social, public, and private variables of which you did not build and were put there before you.

The Organization for Economic Cooperation and Development (OECD) provides comparative statistics on the relative size of government in developed countries based on tax revenues collected. As Figure 2-1 shows, government as a proportion of GDP for all levels of government in the United States is much smaller than most other industrial democracies. At least compared to most of the rest of the world, the U.S. government hardly seems the huge beast gobbling up the rest of society that libertarians conjure up. From location 1177

Note: You bitch about this big government but it’s hard to find one smaller

Most libertarians, as we saw earlier, acknowledge the need for a minimal governmental role in maintaining a functioning market economy. Markets cannot exist without defining and protecting property rights, providing public order, enforcing contracts, and creating and managing a money supply. From location 1194

Why do markets fail to provide “public goods”? In nontechnical terms, in a market no one would have an incentive to produce a public good because it is a kind of good that when provided to one individual is available to anyone else to consume, as well, without payment. A classic movie western scenario provides an example. Suppose a Clint Eastwood character, say the Man with No Name, rides into town offering to sell his services to round up the desperados bedeviling the citizenry. Would he find a market for his services? Would anyone voluntarily hire him to free the town of crime? No individual citizen rationally attentive to his individual self-interest, characteristics assumed of market exchanges, would do so. If any one citizen or group of citizens paid No Name’s price, everyone else in town also would get the satisfaction of seeing, at no cost to themselves, their town freed of crime. Since all have an incentive to be “free riders”—beneficiaries of public order without paying for it, the market would fail to provide it. The desperados would breathe easy as No Name rode out of town having failed to sell his services. The only way citizens could clean up crime would be to impose a tax on everyone and hire No Name as town sheriff.34 This scenario illustrates why the usual institutions that guarantee public order—police, courts, public prosecutors—are a part of government. Even in a capitalist market society where the expectation is that the market will produce just the right amount of most of what we want and need, government needs provide those things the market itself will fail to produce. Along with public order, national defense, clean air, and clean water are classic examples of public goods mentioned in economics texts. From location 1202

Note: Market Failure – The public good. There are many ways of saying this, but this is a quick and effective out of the gate version that should be remembered.

Another kind of failure requiring government action involves the market producing too much or too little of a particular good. This can happen when voluntary market transactions among individuals result in positive or negative externalities—benefits and costs imposed on others not involved (external to) the transaction. The classic example of a negative externality is pollution. In an unregulated free market, a textile factory will dump the dyes used in coloring its textiles rather than dispose of them in an environmentally safe way. Why? Because if the factory owner invested in pollution control, his higher prices would send his customers across the river to buy from the factory that continued to pollute. In a free market neither producers nor consumers have an incentive to pay for pollution cleanup. In fact, both benefit in their individual transactions with each other from the pollution, even if all collectively suffer from it in the long run. Market competition, in the case of negative externalities, prevents individuals from voluntarily tackling a problem like pollution, even if they see the need. The only way to keep the river clean is for a government-enforced law preventing any factory from dumping dyes in the river. If government regulation imposes the same cost of pollution control on all producers, then there is no longer any market incentive to pollute. Government intervention also is necessary when market incentives alone do not induce individuals to produce a sufficient amount of a particular good. From location 1214

Note: Market Failure – The externality

One can identify a long list of “public goods” that some might argue free markets fail to provide and, therefore, government must do. This list might include public health, education, transportation infrastructure, scientific research, historic preservation, national parks and forests maintenance, space exploration, promotion of moral behavior, or support of arts and culture, for a start. From location 1237

Friedman’s argument misunderstands the purpose of a national park system and reflects his myopia about why we need government. If you visit the National Park Service Web site you will find that the government maintains parks not primarily to provide a fun vacation site, but to “set aside by the American people to preserve, protect, and share, the legacies of this land.”37 Private entrepreneurs might do a great job running parks as vacation destinations, but could they be counted on to preserve, protect, and maintain a park as a legacy for future generations? Imagine a privatized Yellowstone. What would prevent its owners from installing a sound-and-light show to accompany Old Faithful? They might even add artificial pumps to boost the height of the geyser to make it seem more impressive to visitors, probably disrupting the natural geyser in the process. In a privatized park system, there would be nothing to prevent owners from modifying or destroying natural attractions if they thought it would attract more paying customers. Protecting a legacy, however, does not produce private profits, and that is why a national park system is a public good government must provide if we are to have it. The libertarian bias discounts the importance of such public goods, thereby underestimating our need for government. More than programs like national parks that offer a public good, programs that redistribute income and wealth are the ones libertarians hate the most. Their faith in the absolute justice of market distributions leads them to regard redistribution as a kind of theft. Libertarian accounts tend to paint government redistribution as taking money out of the pockets of the rich and handing it to the poor in Robin Hood fashion. Yet government programs that involve redistribution in the United States do not fit this image. Most exist for one of two reasons: to provide equal opportunity or to ensure a “safety net.” Equal opportunity recognizes that, in a capitalist market economy, personal resources advantageous to economic and social success are unequally distributed. Some are born into families that can provide the education, cultural advantages, and social connections. Add to these individual effort and good jobs and productive lives easily follow. But people without the same advantages of birth are less likely to succeed. Government efforts to provide education or overcome discrimination that disadvantage some people are intended to compensate for the inequality of opportunity that occurs naturally in a market economy. From location 1253

Note: Beautiful argument articulating the vision of extra market norms, values outside of the price signal that are very important in preserving tradition and authentic natural value. Profit may only serve to incentivise ruin in this case, placing ads and blustery overblown decorations on a beautiful national treasure. It’s a long passage but it’s very important. Redistribution, Extra Market Values, 

A good example of a historic government effort to provide economic opportunity was the GI Bill. Enacted after World War II, the GI Bill provided servicemen (and some women) returning from the war a package of benefits aimed at easing their reintegration into society.38 These included a period of unemployment benefits, guaranteed low-interest loans to purchase homes, and—most important—generous financial assistance to attend college or a vocational school. This was a program of economic redistribution—money was taken from taxpayers and given to the GIs in benefits—but it resulted in one of the best economic investments the United States ever made. A total of 7.8 million veterans took advantage of the education benefit flooding the country’s colleges, universities, and vocational schools. About half of all students enrolled in college in the late 1940s were there thanks to the GI Bill. The program altered the very idea of a college education from a luxury reserved for a rich elite to an opportunity available to the vast middle class. The GI Bill transformed its recipients, and it transformed the country. In one fell swoop, the program raised the educational level and productivity of a major portion of the workforce and provided it with better housing in new suburbs. This had an enormous, positive impact on the economy as a whole—undoubtedly a factor in the prosperity of the 1950s and 1960s. Political scientist Suzanne Metzler shows that the GI Bill also produced a boom in political and citizen activism that raised voting levels, created a generation of public officials, and stimulated voluntary organizations.39 None of this would have happened had returning World War II GIs been left to the mercy of the free market alone. From location 1271

Note: Reminiscent of Government is good, it’s hard to know what to keep, but this is great in attacking two arguments in one swoop, the argument against education and the argument against to the Federal Government in general.

Besides fostering economic opportunity, redistribution is needed to ensure that all Americans obtain a minimal standard of living. Market forces alone will not necessarily provide a minimally adequate income to everyone. Whether due to personal circumstance or ill fortune, some people inevitably will be unable to earn sufficient income to care for themselves or their families. Even for libertarians, leaving some citizens destitute and starving is not acceptable. In fact, one of the most effective “safety net” programs, the Earned Income Tax Cr (EITC), derives from Friedman’s proposal, in the 1960s, for a negative income tax. The idea is to use the tax system to supplement the incomes of those earning very low wages. Under the EITC, low-wage earners submit a tax return like everyone else, but instead of being assessed a tax, they receive from the IRS a check to raise their income. This program compensates somewhat for the fact that not all wages offered in the marketplace, even if one works long hours, are sufficient to support a decent standard of living. In this case, government does not replace the market but supplements it activity. From location 1284

Note: Redistribution – one of Laura Tellers friends, some asshole economist, asked simply “Why do you suppose anyone would go hungry in a free market?” Or some other stupid but equivalent question. While we know the answer, often is hard to come up with the exact answer when not in that mindspace. Well here is about as good of a answer as they come, and its true. Simply put, some peoples wages won’t afford them the cost of living.

Social Security provides retirement benefits to thirty-four million elderly and surviving spouses and children of Social Security beneficiaries and disability benefits to fifteen million additional people. Medicare provides health insurance to people over age 65 ($330 billion in 2006); Medicaid provides health care to the very poor, including nursing home care to the elderly; and SCHIP supports state-level programs that insure children. From location 1356

The 9 percent of the budget ($250 billion) comprised of safety net programs offers one area where the budget might be trimmed, but spending cuts are difficult here, as well. First, some of these too are entitlements—such as food stamps—that can be cut only by changing eligibility rules in existing law. Second, except for the hardest of hearts, low-income housing assistance, child care, energy assistance, school meals, and the EITC are programs generally agreed to ease some of the distress of poverty for our poorest citizens. Taken together, these programs lift nearly thirteen million Americans out of poverty. From location 1367

Note: Chris is fond of using general strokes lime spending has gone up but poverty hadn’t gone down, but here is a clear example of 13 million lifted out of poverty by public assistance.

That leaves the 21 percent of spending for everything else that government does, ranging from the FBI to air traffic control, the Centers for Disease Control to the Food and Drug Administration, or the National Parks Service to the space program. This part of the budget supports federal retiree and veterans’ benefits, education, scientific research, roads, transportation infrastructure including the national system of highways, and foreign aid. This latter item, a popular target for those who decry “big government,” comprises only 1 percent of the federal budget and less than 0.2 percent of GDP—significantly lower than that of most other industrial democracies. From location 1374

Note: Another quick and dirty explanation of what government does for you every day.

The example of Colorado offers a lesson in where a libertarian approach of radical tax cuts and fiscal pressure might lead.59 In 1992 Colorado passed a Taxpayer’s Bill of Rights (TABOR) that placed rigid limits on tax and spending growth—even in times of economic prosperity. Norquist labeled the law the “holy grail” of libertarian budget policy. Even though Colorado is the country’s tenth-richest state, TABOR quickly pushed it toward the bottom in providing health protection and education to its citizens. By 2004, the number of children lacking health insurance had doubled as state government failed to adequately fund its portion of Medicaid spending; this placed the state last among the fifty states in covering low-income children. In 2005 Colorado had more cases of whooping cough—a potentially deadly disease for children—than any other state except Texas, even though it has a fifth the population. This is not surprising, since TABOR caused the state government to reduce funding of childhood vaccinations. Education was especially hard hit: the state dropped to forty-seventh in the nation for support of K–12 education. Because of education-spending cuts, the student-teacher ratio is now among the highest in the country. Colorado has shown what ignoring the value of public investment and government programs can produce. From location 1471

Since the 1970s U.S. society has changed from one becoming more economically equal to one becoming more unequal. As Figure 2-4 shows, in the post–World War II period, the era of the GI Bill, the prosperity of the era was distributed with remarkable equality across all income classes. Annual income growth was substantial for everyone, but remarkably the poorer 20 percent of Americans saw their incomes rise faster than the richest 20 percent. From location 1482

Figure 2-4 ANNUAL GROWTH RATE OF REAL INCOME ACROSS THE U.S. FAMILY INCOME DISTRIBUTION, 1947–2001 SOURCES: William E. Hudson, American Democracy in Peril, 5th ed. (Washington, D.C.: CQ Press, 2006), 277; Gary Burtless and Christopher Jencks, “American Inequality and Its Consequences,” in Agenda for the Nation, ed. Henry J. Aaron et al. (Washington, D.C.: Brookings Institution, 2003), 65. From location 1496

Beginning in the 1970s, corporate leaders adopted a series of policies to “modernize” the U.S. economy, make it more competitive globally, and increase corporate profitability. This process involved reducing dramatically the size of the country’s manufacturing base, especially in key industries such as steel and automobiles, through transferring production abroad, where lower wages could be paid. At the same time, major corporate reorganization occurred through mergers, acquisitions, and financial buyouts. Generally, corporate “downsizing,” laying off large numbers of employees, and selling off less-profitable parts of a corporation accompanied these financial maneuvers. When they lost their manufacturing jobs or were downsized, workers were forced to take jobs at lower pay in service industries. Globalization has been a key aspect of these developments, as corporate titans moved investment capital around the world, seeking the cheapest way of producing goods. This means that many American workers find themselves in competition with workers worldwide, from Bangalore to South Africa, who are willing to work for less. Corporate employers have encouraged this competition through aggressive anti-union efforts to undercut the domestic bargaining power of workers. In the 1950s, close to 35 percent of nonfarm employees belonged to a labor union; by 2000 only about 8 percent did. Unlike their grandparents, workers are on their own in negotiating wages and benefits with their employers, who can easily offer much less than they would if faced with workers organized collectively in a union. From location 1502

Note: Inequality – Some quick causes, but the main reasons are far broader

Finally, tax policy has contributed substantially to growing inequality. Between 1979 and 2000, change in after-tax household income has delivered higher incomes in the same stair-step fashion across the income distribution as the pretax increases shown in Figure 2-4. Only when the impact of the tax law on incomes is taken into account are the steps at the higher end of the distribution giant sized. Increases in after-tax income for 80 percent of Americans ranged from the meager 9 percent increase for the poorest 20 percent to a more respectable 24 percent for the next to the highest 20 percent. But the richest 20 percent gained 68 percent—well over three times as much as the rest of Americans and the very top 1 percent saw their after-tax incomes grow an amazing 200 percent. The Bush tax cuts have exacerbated this trend, delivering over a short period of time a 7.5 percent increase in the incomes of millionaires compared to only just over 2 percent for middle-income earners. Clearly, tax policy changes since the time of Reagan’s supply-side tax cuts have been regressive, making economic inequality worse. From location 1522

Note: Tax policy and inequality

Most of us need some level of stability and security in income to live a happy and productive life. From location 1547

Note: In response to Conservatives ridiculous suggestions ranging from jumping from job to job at will (childrens schools, personal relationships, social arrangements, family arrangements, stability and anxiety) to any suggestion that is unrealistic, simple happiness comes into play here at some point.

Finally, since Aristotle, political philosophers have warned of the deleterious impact of extreme economic inequality on community life. Economic and social differences divide citizens from one another to such a degree that they become unable to understand each other or live together in peace. This can be especially dangerous for democracy, which depends on citizens’ ability to respect one another as mutual participants in a common enterprise. Only when we have some capacity to understand one another’s concerns and lives can we hope to devise mutually acceptable solutions to common problems. From location 1548

Note: I doubt it would resonate with conservatives but it is a fantastic passage on the ills of a separated and segregated society.

In today’s politics, according to a task force of the American Political Science Association, “ordinary Americans speak with a whisper while the most advantaged roar.”65 If this situation persists, the wealthy are likely to understand less and less the needs of the rest of society as they amass increased power to determine our collective destiny. The common good will not be achieved if only the voices of those who prosper most are heard. Nor does a society sharply divided between the haves and the rest conform to the American Dream of a middle-class society with prosperity for all. From location 1553

What might be done, however, would be to let the winners in today’s market economy compensate the losers. This requires the sort of economic redistribution that is anathema to libertarians, but it works. European countries that have been subject to the same global market forces as the United States have experienced much less inequality because of redistributive social welfare programs. The very safety net programs that have eroded in this country due to structural deficit pressures have been maintained there. To accomplish similar redistribution here would mean increasing public spending for the poor, such as a more generous EITC program; shoring up, not privatizing, social insurance programs that provide economic security to the middle class, like Social Security and Medicare; and creating new programs such as universal health insurance or universal child care. The large structural deficit we now face makes accomplishing this quite difficult. One way to address it will require reversing the tax policies of recent years and returning to a more progressive tax system to generate additional public revenue. From location 1562

Note: Redistribution

Progressive taxation can be justified philosophically on several grounds.67 One relies on what is called the benefit principle, the notion that every taxpayer should pay in proportion to the benefits they receive from government. At first glance this seems to imply taxing the same proportion of everyone’s income, but since the rich can be seen as benefiting more from government protection, payment in proportion to benefit received demands that the rich pay more. The rich benefit most from the order and safety government provides, and they would have more to lose from a foreign invasion or criminal anarchy than those with less property. In terms of political obligation, the rich have a greater responsibility to return to the community the wealth they derive from living in it. A second philosophical argument relies on the “ability to pay principle.” The rich can tolerate providing a larger proportion of their income to support government because they sacrifice less in doing so than someone with a lower income. A rich family, as this reasoning goes, has more discretionary income—income left over after paying for necessities—than a poor person. Paying a higher proportional tax may prevent the rich from enjoying a week in the Bahamas this year, but, unlike the poor, they will not have to skip a meal as a result. Finally, the concept of social justice supports progressive taxation because ensuring a minimal standard of living to all and preventing large inequalities of wealth in society requires redistribution. Taxing a greater proportion of the incomes of the rich in itself limits how much they can accumulate ensuring greater equality. Taking a larger proportion from the rich makes available the revenue for public programs to support the incomes of the poor and open up economic opportunities through education or job training. All three of these arguments reflect a communitarian understanding that sees individuals intimately connected to their communities, deriving their individual well-being as much from others and community ties as from anything they possess by themselves. From location 1574

Note: Progressive Taxation

The problem with consumption taxes, such as the sales tax, the value added tax (a tax common in European countries), and the flat tax is that they are regressive. Since people earning lower incomes must devote more of their money to consumption than wealthier people, they end up paying a larger proportion of their total income in taxes than the rich. From location 1675

Tapping into the incomes of those most well off, as a progressive income tax does, to meet social needs becomes impossible under a flat tax. Hall and Rabushka themselves admit that their flat tax, compared to the current income tax, would raise taxes on middle-income wage earners while those families “with incomes around $285,000 receive tax breaks of about 7 percent of income, those with incomes of $1.5 million get 10 percent, and the handful with incomes approaching $4 million get 13 percent.” From location 1682

Note: If progressive taxes “punish success” then the flat tax punishes the middle class and wage earners, a common Conservative goal since they deserve to suffer for being “too lazy to be rich.” Since most poeple a are wage earners its just a way to make life even harder for most people trying to get by while making it easier for those who already have it the best. Furthermore, even more helpful social programs are foreclosed upon and the goal of a Plutocracy is furthered.

As a practical matter, then, what the flat tax does is tax more heavily the ordinary workers who earn most of their income from wages and salaries, while freeing most of the income of the very wealthy from taxation. Cries about the unfairness of “double taxation” hardly compare to the unfairness of a flat tax regime where the assistant manager of the local grocery store would see his annual $50,000 salary taxed at the flat tax 20 percent rate, while his rich uncle across town would pay zero on his $500,000 income from his investments. From location 1693

Note: If you’re worried about fairness, which is a strange thing for a conservative to complain about, losing tge ability to finance your childs college or repair your car is more unfaur than having no taxes simply because you are rich.

The libertarian illusion is that this shrunken government will permit a better society. A society without a government capable of offering a safety net to the destitute, providing educational opportunities to future generations, ensuring a dignified life to those in their final years, preserving our cultural heritage for posterity, assisting those caught up in natural disasters, and protecting us all from foreign enemies will not be a good society. From location 1711

Note: Why would this be better? How could the Libertarian argue that markets could do all of this? We have many good examples, but this is a good opening salvo to the Libertarian illusion.

The libertarian brief against progressive taxation is based on mistaken assumptions. The distribution of income and wealth cannot be regarded as sacrosanct and inherently fair. Some rewards from the market are due to individual effort and skill, but they also are a consequence of luck, opportunities made available because of government-provided benefits—at minimum law and order, and the investments other people now and in the past have made to permit earning income and accumulating wealth. Markets also tend to lead to unequal outcomes that accumulate over time. Those who benefit today usually can invest market success in future success. Progressive taxation allows both tapping into the incomes of those best able to pay for public needs and permits some redistribution of market outcomes. From location 1738

Yet the experience with tax increases of the early 1990s that were followed by an economic boom shows that there is room for raising marginal tax rates without undermining economic productivity. Libertarians are correct to warn that if taxes are too high and if the system becomes too progressive, economic growth might be stalled. However, historical experience suggests that there is considerable room for taxing progressively without threatening economic growth. From location 1750

Social justice also requires that an affluent society like ours ensure a minimally decent standard of living for the elderly and all people. Social Security and Medicare are the pillars for such a living standard for the old, but we also need to be mindful of those in need who are not old—the safety net for our least well-off citizens. Budget deficits in recent years have created large holes in that safety net that must be repaired. Along with shoring up existing portions of the social compact, a major contribution from government revenues will be required to address the crisis in U.S. health care (see chapter 5). The United States cannot much longer afford a health system that both costs more and produces worse average health outcomes—such as life expectancy and infant mortality—than those in other industrial countries, plus fails to insure over 40 million of its citizens. From location 1757

Higher levels of public investment in education will be needed if our citizens are to have the knowledge and skills to compete in the flat world. Besides investments in human capital, we need to refurbish the physical capital of the country. Transportation will be one area of needed investment in years to come—to repair highways and bridges, modernize air transport infrastructure, and build an adequate passenger rail system. In recent years, congestion on the highways and in the air points to the need for building high-speed intercity rail systems comparable to those in Europe. Such a rail system also would reduce pollution and be more energy efficient. This brings us to environmental needs, especially the threat of global warming, and energy needs. Both also will need to be important priorities in future budgets, along with many other investment needs. From location 1769

Benjamin Page and James R. Simmons, What Government Can Do (Chicago: University of Chicago Press, 2000), From location 1841

This discussion relies on Slemrod and Bakija, Taxing Ourselves, 59–65. From location 1888

Deregulators, with their absolute faith in markets, simply assumed competition among producers inevitably would lead to lower prices. As it turned out, electricity generators chose to make money through collusion rather than competition. Free of any regulation or oversight, by 2000, the companies that sold electricity in the wholesale market learned they could drive up prices through creating artificial shortages in electricity. During periods of high demand, they would take power plants off line for repair or maintenance or otherwise withhold supplies driving up the price. They then would release the power at the higher price. Soon California utilities found they had to pay more than 6.5 cents per kilowatt to obtain energy and, when supply was especially tight, they had to institute rolling blackouts to prevent system collapse. At the time, deregulation defenders blamed the wholesale electricity shortage on too little new construction of power plants due to environmental regulations, but the Federal Energy Regulatory Commission (FERC) eventually concluded that producer market manipulation was the major factor in the crisis. From location 1935

Note: Collusion, remember it isnt compitition but profit that is the most important thing. If companies can collude for higher profits, they are incentavized to do so.

Without regulatory oversight, the California case proved that unscrupulous corporations, like Enron, could use their market power to manipulate prices. From location 1953

For decades in the United States, policymakers understood the need to balance market values with other common values and compensate for market failures. Regulation has been the mechanism used to make certain that markets served the public interest. From location 1964

First on the list was an expansion of the powers of the Food and Drug Administration (FDA) to regulate the safety of prescription drugs in the wake of a scandal involving the drug Thalidomide, From location 2044

Note: Here is a direct refutation of a typical argument against one of the Libertarians demons, the FDA. Ad hoc solutions like suits come too late. A lawsuit is little compensation after your child is deformed. “Online reviews” rely on untrained people to review with limited information. Deformities could occur among many individuals without any one of them being able to parse what single thing caused it. You cannot do your own research when information simply doesn’t exist.

Economic justifications for regulation derive from the theories of market failure that were introduced in the last chapter. To review, even if we assume that most goods and services will be produced as a result of private voluntary transactions among individuals in a free market, there are certain situations when the market by itself will fail to produce certain goods and services adequately and efficiently. We already have examined how the market fails to produce certain public goods, in general, and the need for a range of government actions to provide for them. Government regulation is usually justified in the case of three particular market failures: monopolies—natural and anticompetitive, imperfect information, and externalities. As noted earlier in the case of utilities, a natural monopoly is a product or service that a single producer can create more efficiently and cheaply than if multiple producers competed to provide the service. Economists point out that, unlike goods produced in competitive markets, in natural monopolies the average cost of goods produced declines as output increases.14 For example, once I invest in the generators and transmission lines for providing electricity to a town each customer added to the grid makes the cost per person served lower. In this situation, I always could offer a lower price for my service than any competing company that might want to make the huge investment in a second grid to serve the customers not yet connected to my grid or to lure any of my customers away. The existence of natural monopolies poses a problem for consumers who are supposedly “sovereign” in market economies because they have no alternative providers of goods they consume. In the case of natural monopolies, that market sovereignty dissolves, as they are at the mercy of a single firm and any price it wants to charge. Regulation, in this case, is expected to replace the absence of market competition. Government regulators make sure that the monopoly good is produced in a way that is fair to both the producer, in the form of fair return on investment, and the consumer, in the form of an affordable price. From location 2069

Markets where one or a few firms obtain overwhelming control as a result of competitive forces also justify regulation. This sort of monopoly places consumers at the mercy of a single or handful of firms that, without significant competition, can set high prices and are under no pressure to produce quality products or services. Anticompetitive monopoly power also places such firms in a position to engage in predatory pricing—prices set temporarily below the actual cost of production—to prevent any potential competitors from entering the market. The purpose of antitrust laws is to prevent such a situation from developing in a particular industry. These and other regulations, also, aim to regulate practices, like predatory pricing, that interfere with healthy competition. From location 2085

Note: A good argument for how government and regulation can increase compitition and efficiency.

Just as natural and anticompetitive monopolies undermine consumer sovereignty in unregulated markets, consumers who lack information about the products they buy cannot control adequately the quality of products or services available to them. When the pipes in my house start to leak, I will want to hire a plumber whom I know will be competent to fix them (and not do additional damage to the plumbing in my old house). For someone as unhandy and unknowledgeable about plumbing as I am, state licensure of plumbers offers some assurance that hiring a licensed plumber to do the work will result in a competent job. Of course, if plumbers were not licensed I could rely on recommendations from friends or referrals from previous customers, data available in a market (and that I would use even in hiring a licensed plumber); but in an emergency obtaining such information may not be possible, nor may the advice of my equally plumbing-challenged friends be all that reliable. State licensure of plumbers provides some assurance that those offering their services in this area meet certain minimal standards of competence. Moreover, the plumber I hire will know that failure to do a competent job might put his license in jeopardy—an incentive for conscientious work. What applies when I want some pipes fixed applies as well to the heart surgeon who might be needed to unclog my internal plumbing. With many technically complex products on the market in a modern economy, none of us has the competence or ability to evaluate the quality and effectiveness of many of the things we buy. Market theory assumes that consumers will be competent to judge by themselves whether product A or product B best satisfies their wants and needs. This competence may come from previous experience with a product or an ability to evaluate its quality directly. For much of what we consume today, this cannot happen because of the complicated character of a product and the complexity of production systems. Much of the food we consume today, for example, includes additives and ingredients we cannot be aware of unless regulations require their disclosure. In the case of medicines, no one can be sure that a pill taken to treat a disease will be safe and effective without some regulatory oversight. Few of us would be willing to acquire information about our medications based on trial and error—such a strategy might prove fatal! Often, requiring disclosure of information regarding ingredients or methods of production may be adequate for addressing this market failure, but review of products prior to sale or mandatory withdrawals of products proven unsafe are needed. Agencies like the FDA and CPSC utilize these methods to compensate for the market’s failure to provide sufficient consumer information. Finally, the concept of externality, as described in chapter 2, provides a further justification for regulation. The individual costs and benefits achieved in market exchanges often do not absorb all of the social costs and benefits of the exchange. The coal-burning power plants of Midwest industries will include in the prices of their products the cost of the power needed to produce them, but unregulated they are not likely to include the cost of preventing their emissions from entering the atmosphere and returning to Earth in the form of acid rain in the Northeast. The only way to prevent the environmental damage of acid rain is to require those power plants to invest in pollution control devices, rather than impose the social cost of their emissions on people in the Northeast. A host of environmental and other kinds of regulations can be justified in these terms. From location 2090

Note: Externalaties, and values and harms not captured by market signals. Licensing addresses a market failure known as asymmetric information, or imperfect information. It is the very embodiment of consent in a market economy, because it allows a person to give informed consent, the only meaningful conception of consent or choice. It enhances freedom by making it more possible for a person to make a beneficial choice.

While most economics texts typically cite market failure as the sole justification for government regulation, many of us can identify nonmarket reasons why government needs to regulate the behavior of businesses and individuals. The language included in many regulatory statutes regarding serving the “public interest” reflects something more than just the goal of economic efficiency. In communitarian terms, the reference to public interest means making sure that regulations ensure that the common good is protected and enhanced. To serve the common good, regulation may be needed to achieve at least the following four goals: correct imbalances of power and influence within the market, ensure and promote individual safety and well-being, nurture the attributes of a good society, and promote social justice and equality. From location 2116

Markets allocate more than just goods, services, and money; they also allocate power. The common good sometimes means regulation is required to balance that market power. From location 2125

Interestingly, in the 1980s the Friedman approach to natural monopoly was tried when the United States’ nascent cable TV industry was deregulated. When cable TV was first introduced in most communities, it tended to be regulated by utility commissions in the manner of most local utility monopolies. After revelations of corruption in the awarding of cable franchises in some communities, the Reagan administration intervened, but rather than impose federal regulations to prevent the local corruption, it adopted the Friedman approach and, in the 1984 Cable Television Act, abolished all regulation of cable TV prices.20 Supposedly, competition from other and emerging technologies, such as home video rentals, over the air broadcasting, and satellite television, would restrain cable prices. For consumers, however, cable access soon became a necessity (alternatives such as satellite TV never became competitive), and the industry took advantage by charging exorbitant rates. Eventually, in 1992, some re-regulation of basic rates had to be restored, but the 1996 Telecommunications Act deregulated the cable industry completely, again based on the argument that new technologies would restrain prices. Again, absent regulation and real competition, cable companies gouged their customers, increasing rates 36 percent by 2002—triple the inflation rate. From location 2204

Note: Just another real world example that they will dismiss and ignore in order to preserve their fairly tale.

The libertarian position regarding anticompetitive monopolies depends on circular reasoning that whatever results from market forces must be good for markets. From location 2214

This circular reasoning assumes that if market forces lead to a monopoly then that must be the most efficient arrangement, since market forces always produce the most efficient result. The possibility that markets might fail to do so is assumed away. From location 2221

That, absent government oversight, some of these group practices might be run by unscrupulous individuals seeking to misrepresent their “reliability and quality” through misleading advertising, covering up mistakes, or cutting corners to reduce costs escapes Friedman’s notice. Nor does Friedman seem concerned that a malpractice suit after a failed open heart surgery may not be an attractive method of revealing an unqualified doctor. Most of us would prefer some mechanism for assuring the qualifications of a surgeon prior to going under the knife! From location 2238

Coase himself acknowledges this to be so in pointing out that regulation is needed “when, as normally the case with the smoke nuisance, a large number of people is involved and when therefore the costs of handling the problem through the market … may be high.” From location 2276

Note: Coase theorom doesn’t work with lots of poeple over a wide area when the harm is too spread out and cannot be traced back to its source.

The exercise of market power has traditionally been why government regulation has been deemed necessary. Preventing anticompetitive, private monopolies and public oversight of natural monopolies is meant to prevent monopolists from using their dominant position in a market to coerce either potential competitors or consumers. If we assume, as libertarians do, that people act in a self-interested manner in markets, then we should expect some individuals to take advantage of opportunities of their market power to benefit themselves. The Enron electricity traders who induced California blackouts to squeeze more money from Grandma Millie also were extracting “rents,” but they were doing so using their market power rather than regulation. From location 2353

This bit of perverse logic, of course, is at odds with the reality of hazards in the textile industry, from cotton dust and toxic dyes, or the poultry industry, from repetitive motion injury and severe cuts—two of the lowest-paid industries in the country. From location 2380

Sometimes relatively high wages in mining are cited as proof that workers are compensated for hazardous work, but good mining wages are thanks to the United Mine Workers union. Prior to unionization in the 1940s, mining paid very low wages. Workers find themselves in hazardous jobs not because of the attraction of nonexistent high wages but because many unskilled workers have no alternatives. Yet again, libertarian criticisms ignore hard facts about benefits from OSHA, which since its creation has cut workplace deaths in half. From location 2382

More recently, the Telecommunications Act of 1996, despite its deregulation thrust, included provisions to ensure free access to the Internet in public libraries, schools, and other public facilities, including offering access to people with disabilities. Neither the market nor voluntary charity can be relied upon to provide such access. From location 2433