Boudreaux on Greek Protesters

Don Boudreaux in the Christian Science Monitor writing on Greek protesters with exactly the same feeling as me writing about the French. Don of course is much more eloquent and thoughtful.

http://www.csmonitor.com/Commentary/Opinion/2010/0507/Greek-protesters-Ready-to-face-reality-about-the-debt-crisis/(page)/2

Your country is hailed as the cradle of Western civilization. This honor is
justified, not least because of the unprecedented flowering there, 2,500 years ago, of that most wonderful, unique, and useful of all human abilities: reason.

Alas, your behavior over the past few days will severely tarnish Greece’s reputation as a home to reason. You are behaving childishly and thoughtlessly – that is, unreasonably.

Screaming in the streets, waving banners, and tossing homemade explosive devices at the police do absolutely nothing to address the very real problem your country faces. That problem is that your country is not as wealthy as you would like it to be. Nor is it as
wealthy as your government led you (and others) to believe it was.

In short, your economic pie is too small to satisfy all of your demands. Railing madly against this reality, however, does nothing to increase that pie’s size. Resources and wealth are produced neither by angry sloganeering nor by simplistic denials of the facts. Quite the contrary.

For decades your country has lived well beyond its means. Thirty years ago, your government’s debt-to-GDP ratio was 34.5 percent. Today that figure stands at 115 percent. In other words, for decades your government borrowed money to provide you with
goods and services that you couldn’t afford.

Living on credit is fun while it lasts. But reason tells us that it cannot last forever. Now that the bills are coming due, you must somehow pay them. This requirement is unavoidable.

No reasonable adult is shocked or angered when the bill for the lavish meal that he enjoyed last week arrives in his mailbox today. Paying that bill is never pleasant, but it must be done. The reasonable adult pays. He doesn’t scream in anger at the bank that loaned him the money to pay for the meal. He doesn’t blame others for his debt obligations. And he doesn’t demand that people who are in no way responsible for his decision to buy that expensive meal, and who didn’t share it with him, nevertheless help him to pay for it.

The reasonable adult also knows that if he refuses to pay his debt, he might keep a few more euros in his pocket today, but only by sacrificing his future ability to borrow. And he knows that his resulting reputation for forcing others today to pay his expenses will diminish the willingness of others tomorrow to deal with him economically.

In short, the reasonable adult doesn’t clamor for something-for-nothing. Instead, he works and saves, knowing that, over the long-run, nothing is free.

In your defense, I realize that the steady stream of goods and services that your government bestowed upon you until recently seemed to come out of nowhere. This illusion perhaps misled you into supposing that whenever government borrows to pay for goods and services, it does something fundamentally different from what private individuals do when they borrow to pay for good and services.



In fact,
though, reason informs us that government, being a human institution, is subject
to all the laws and constraints that bind every other human endeavor. Despite
appearances, the past few decades’ massive spending of resources that allowed
you to consume more than you produced has made you poorer today (for those
resources are now, well, spent – gone – used up). And this deficit spending has
burdened you with debt from creditors who quite justifiably wish to be repaid.

While I do not excuse your government for misleading you about its
powers to spend without constraint, I cannot excuse you – you from reason’s crib
– for your present stubborn and mad refusal to accept the reality of your
government’s near-bankruptcy.
Your government simply does not have available
to it all of the resources that are required to satisfy all of your demands.

Your only reasonable course of action, then, is to work harder, save
more, and adopt wiser public policies that promote wealth creation. Chief among
these policy changes is to reject the socialism that you have been infatuated
with for too long now. You need greater respect for private property. You need
entrepreneurship. You need competition. In short, you need free markets. Without
these, you will never become more prosperous.
If you wish, of course, you
can continue to deny this reality – a reality that is now slapping you in your
face. But as the economist Thomas Sowell is fond of pointing out, reality is not
optional. He is both right and reasonable.

Donald J. Boudreaux, a
professor of economics at George Mason University, is the author of
“Globalization.”

Super-star super-profits - inspired by Iggy

Several times now I have heard the argument that taxing either supermodels or massive income sports stars would be efficient because it wouldn’t change their behaviour. The analogy is then extended to support other more realistic ‘super profits’ taxes.

The way I understand the super profits arguments is something like this. David Beckham earns millions a year playing football, when in fact, everything above the first million is superfluous. One reason it’s superfluous is that he has a low opportunity cost for is time since his alternative, given his intellect and education, is probably about $30 000 a year digging ditches for the local council. We feel comfortable that we can draw a line at a million without discouraging others to get where he is and be certain that he will continue to play football. Everything over a million we can tax at some ridiculously high rate (given the rate is probably already around 50% its presumably gonna be pretty high so let’s assume 100% for fun).

As far as a moral vacuum of a stationary bandit tax economist is concerned, his job is done. He has his efficient tax because he can bleed Beck’s as much as he likes, but Beck’s won’t go anywhere because his next best option isn’t nearly as inviting as a million bucks a year for playing soccer.
But for a real economist, his job is to ask “and then what?”

To me it seems wrong on at least both important counts.
1) (at least in this particular case) it’s not true that Beck’s can’t change his behaviour; and
2) (more generally) even if he couldn’t change his behaviour, the argument is still wrong because others can and that will lead to costs being passed down the chain.

The most obvious way he could change his behaviour is that he could work less by retiring earlier. I am happy to completely disregard this since I wouldn’t be surprise if at that level the income effect dominates – higher income means I consume more leisure and vice versa when the stationary bandit hits me for 29 million a year. I will also disregard the possibility that he could flee the country to a better taxing environment.

What I would suggest is that most of the marginal dollars that a sports person earns are advertising dollars. They appear on adds, link themselves to sports brands and fashion magazines, and prostitute themselves in cars they wouldn’t normally be seen dead in. Would he really keep doing this stuff if he didn’t get paid for it?

All the intuition I need for the second point is that the money he earns comes from using his scarce resources to produce something of value for someone else.

If everything after the first million is pointless, who gets David Beckham? Manchester, Madrid, LA Galaxy or a no-body-cares team in 4th division who can still afford a million dollars for a superstar? Perhaps he will end up coaching some under eights team because some billionaire farther want’s his kid to learn from the best and a million bucks for a real life superstar babysitter to keep his kid happy seems like a bargain.

Why did Beckham go to Galaxy? Because they offered a lot of money. They did that because they believed he could enhance the value of their sporting product to the US soccer fans. Madrid is a glorious football side willing to pay lots for him. How does Galaxy communicate that he would produce more value for others in the US? They do that by paying 300 million pounds for him to move to a footballing backwater with a huge potential market that is starved for talent. That price signal gets lost when the consumers of Beckham can’t compete on price.

Same logic applies for advertising, if he still bothers to do it, which brand can make the most use of him. Which target audience most wants to wear the same underpants as David Beckham? Values are communicated through prices. Dull the price signal and resources go to suboptimal uses. Remove price signals and you end up with health and education.

Of course, there would still be competition for the footballer’s services. The duller the monetary price signal, the more Beckham will want other types of payment harder for the stationary bandit to get at. More luxurious travel arrangements and club facilities, softer training regimes (this one could easily belong above with “work less”), clubs could offer post match parties restricted to just the players and ‘carefully vetted’ women. Clubs and players would just be encouraged to trade in a less efficient currency.

In short, I just think it simply isn’t true that there is a free tax lunch. If you haven’t found how people will change their behaviour, look harder. If you are taxed on ‘super profits’, at the very least, the incentive to innovate, (ie to take risks to benefit consumers expand profits further) will be diminished and that is not trivial in the long run.