Follow the money, or why we need voluntary exchange all the way down

My friend Brian Vaeth gave me some useful feedback on my last post. It’s not just that state government is more distant from local city concerns, and therefore less likely to allocate resources effectively. It’s that even local leaders are not free from corruption and venality, and cooperation with local authorities will not guarantee that money goes where it is needed the most, rather than in the pockets of local politicians and the politically connected.

The situation is a lot like foreign aid. The main problem with the national government giving money to foreign countries is that the resources are not allocated to those who can make best use of them. Instead, they are given to local political leaders, who frequent misuse the money, since there is no accountability. This is generally case with government funding: since the government can’t really run out of money, since it taxes or prints what it needs, it has much less incentive to use it wisely or ensure that it goes to the most deserving.

What I said before still stands, however: we need to know what is holding developers back from improving on the blighted properties. I was fortunate to find the writing of Matthew Loftus recently. He is a resident of Sandtown and has much to say about local, non-government efforts to improve blocks even in the worst neighborhoods. This shows that things can get better without government meddling. The question now is how to enable these efforts further by removing restrictions.

Keynesianism and urban renewal

A new op-ed in the Sun gives qualified praise to Governor Hogan’s plan to spend $700 million of the state’s money on demolishing vacant buildings in Baltimore, with a view to creating either green spaces or new housing. While the authors generally accept that it is right for the state government to spend more of the state taxpayers’ money on the city’s problems, they raise concerns that the project will not meet local needs without local cooperation and oversight.

The concerns are genuine, but the premise is false, namely that the government can even be trusted to make the right decisions on these matters, which is the essence of Keynesian thinking. Believers in government solutions seem to forget they’ve been in charge of Baltimore for fifty years now, and what have they done with this power? Is there any reason to think they will suddenly change and begin to allocate resources responsibly? Just look at the recent scandals at the city Housing Authority, which, by the way, involves government and government finance at all levels: city, state and federal.

The correct approach is to find out the ways in which government is holding back development currently. Vague diagnoses of “structural racism” and naive calls for more government intervention just don’t cut it at this stage. We need to give our trust back to the private sector, including the actual owners and tenants of the communities concerned.

Living on the edge

I live in Roland Park, which most know to be the first planned neighborhood in the country, and to this day has very upper-class connotations. But I live at the very southern end of the neighborhood, right up against traditionally working-class Hampden. Both neighborhoods are predominantly white. Walking up Roland Avenue to my church and walking down the avenue to my post office really brings home how different neighborhoods can be, even right next to each other. And as I learned in books like “A Spool of Blue Thread” by Ann Tyler, these boundaries have persisted over the years.

Hampden has been gentrifying for some time now, but you still definitely get a lower-class feel when walking around the area. Some aspects are charming, like the garish Christmas decorations on 34th Street or the kitsch of HonFest. Other aspects are sadder, like the lonely drunks I saw in the park on Thanksgiving weekend, or the local families that my church helps at Christmas time, because the parents can’t afford presents or nice food for the kids during the holiday season.

Baltimore is known nationally as a city of stark racial divides, and I imagine most people see those as coextensive with social divides, but the divide between Roland Park and Hampden shows a stark contrast between wealth and poverty even among people of the same race, living in close proximity. It gives me much food for thought and a strong desire to learn more about this city and its history.

The Sun gets it almost right again

Today’s Sun editorial is another near-victory for common sense in the Sun. The authors note that Maryland small businesses are being punished by the so-called “personal property tax” (which taxes inventory), and support Governor Hogan’s proposal to scrap it for businesses with assets of under $10,000. They further note what is perhaps even more grotesque than levying an extra property tax on businesses (on top of the “real” property tax on land and buildings): the annual filing fee of $300 that the state slaps on top of the tax, which frequently amounts to considerably more than the value of the tax itself (average tax bill for small businesses is $72). No wonder business is fleeing the state!

So yes, we can all agree that small businesses shouldn’t have to pay the personal property tax or the associated filing fee. But the problem, of course, is what happens when businesses go over that $10,000 threshold. “To be sure, there would need to be mechanisms to check whether a business that certifies itself as having less than $10,000 in assets doesn’t grow to a much higher level,” intone the editors. Yes, we must be sure to punish success! Businesses that grow too big by serving their customers and shareholders better than the competition will not be tolerated! I wonder if they consider how many potential jobs are foregone when businesses have to stop themselves from expanding too much, lest they incur this financial penalty. Better not to have this tax at all!

Here is some education on the related topic of antitrust legislation and why it is absurd to punish business for being too successful.

Should the city try to curb sugary drinks?

As a new resident of Baltimore City, I feel a convert’s zeal for my new home. One aspect of this is a subscription to the local newspaper of record, the Baltimore Sun. Unfortunately, me being of a conservative/libertarian persuasion, ttthis at times results in a good deal of grumbling on my part over the paper’s liberal editorial slant. To get things off my chest, therefore, I have set up this blog to offer my critique of their positions, along with suggestions for better approaches to the problems they address.

Today’s editorial on a proposal to mandate health warnings on sugary drinks, however, came as a pleasant surprise. The context is that Councilman Nick Mosby and Health Commissioner Leana Wen have proposed that businesses in the city be required to post warnings along the lines of a similar requirement imposed last summer in San Francisco. The San Francisco warning reads as follows: “WARNING: Drinking beverages with added sugar(s) contributes to obesity, diabetes, and tooth decay.” While the intentions behind such a warning are no doubt good ones, the Sun rightly notes that there is as yet no evidence that such warnings help curb obesity, and therefore, from a purely consequentialist and utilitarian point of view, the cost of forcing businesses to post such warnings is not justified as of this time, especially in view of the current economic woes of the city.

They also allude to a more principled reason to object to the proposed mandate, which is that government should exercise special care before imposing new regulations on the private sector. “Just as individuals should be cautious about their dietary choices, government must wield the regulatory bludgeon with care,” they declare in the final paragraph. This is a reasonable position to take even for one who is otherwise supportive of the notion of private sector regulation, since it puts the burden of proof on government to show that the new regulation would help, rather than harm, people. In other words, the government shouldn’t use the public as guinea pigs, in order to try out new rules that seem like good ideas in the abstract; on the contrary, proposed regulations should only be imposed after evidence has been produced of their benefits.

However, the Sun concedes that, if it could be shown that such warnings brought about a reduction in obesity, the city would be justified in forcing businesses to post them. This is where I part ways with the editors’ reasoning. While I agree that prevention of obesity is a worthy goal in itself, I don’t believe the government has any business interfering in private exchanges between businesses and customers; as long as no force or fraud has taken place, what goes on between a business and its customer should be between them only. Secondly, the government’s job is not to ensure that we live healthy lives, but to ensure that we are free to live our lives healthily or unhealthily as we choose. I find it ironic when people refuse to countenance legislating private morality, while feeling justified in legislating private health for our own good. As far as I’m concerned, either you believe in individual freedom, or you don’t.

The only justification for imposing such costs on businesses would be to offset the costs of obesity on the public. The editorial mentions CDC estimates of over $147 billion in annual costs due to obesity, though there is no mention of how much of these costs are borne by the taxpayer and how much are borne by private citizens. I took the trouble to look up the academic paper that is the source for this figure (1), and the abstract suggests that about half the costs are paid by Medicare and Medicaid, with the rest paid by private insurers, which are themselves heavily subsidized by the taxpayer in one way or another. So it is reasonable to conclude that at least $75 billion of these costs are paid by the government, i.e. the taxpaying public.

Full privatization of the health industry, of course, would ensure that all the costs of obesity are borne by the private individuals concerned, rather than the public. This, I believe, would provide the necessary incentive for individuals to take precautions against obesity and limit their own consumption of sugary drinks and other fattening foods, or for parents and guardians to limit the sugar consumption of their dependents. Naturally, it must be recognized that this idea has very little public support, and this post is not the place to argue for a completely free market in healthcare. As long as we insist on socializing the costs of healthcare, I believe the government does have an interest in limiting or offsetting these costs by well-considered regulation.

However, let me suggest that enforcing mandatory warnings on private businesses are not the best use of government resources. As the editorial already concedes, the effects of such warnings have not been demonstrated. But even if it could be shown that such warnings led to a reduction in obesity, this mandate would only represent an added cost to businesses and government, without any compensating savings or revenue, except indirectly in the form of a possibly reduced public bill for obesity treatment.

There is a better way for the government to capture the costs of obesity more directly: the soda tax. The advantage of the soda tax is that the government would raise revenue that could go directly towards offsetting the costs of treating obesity. There would also be an added incentive for the consumer to reduce consumption and help stave off obesity, for those whose primary motivation is actively reducing obesity rates.

The evidence that soda taxes actually do help reduce obesity rates is mixed. In 2014, Mexico imposed a 10% tax on sugary drinks, but a study showing that the tax led to decreased consumption is disputed (2). Nevertheless, from a strictly economic point of view, what matters is not whether the tax limits an undesirable behavior, but whether it captures the cost of the behavior that is borne by the government. Of course, once this is granted to be the main motive behind the tax, other possible solutions present themselves: one could reallocate spending, or increase taxes on completely unrelated things. An excise tax on sugar itself, however, would seem to be the most “fair”, given that it is the sugar that is held to be the direct cause of obesity.

But once sugar is recognized as the culprit, it’s worth reminding ourselves that the market price of the form of sugar used in American soda, i.e. corn syrup, is probably lower than it should be, owing to government subsidies. Yes, what’s so often unmentioned in these debates over public health is the extent to which the government is already subsidizing the obesity epidemic through various misguided agricultural policies (3). Imposing a soda tax to balance out the corn subsidy would represent a pinnacle of bureaucratic absurdity. Perhaps before the government considers imposing more costs on the private sector to fight obesity, it should entertain the idea of spending less on promoting it in the first place.

(1) http://content.healthaffairs.org/content/28/5/w822.abstract

(2) http://www.therecord.com/opinion-story/6229203-opinion-sugar-coating-the-truth-about-soft-drink-taxes/

(3) http://www.huffingtonpost.com/2013/07/18/agriculture-subsidies-obesity_n_3607481.html