Public Finance

Incentives and Economics

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A few years ago I went to Norway and had a great time. In this post I described how expensive everything was in Norway due to their highly valued currency (tied to oil riches) combined with the relentless decline of the US dollar (tied to ZIRP and other dubious economic moves). In the simplest terms, a fast food meal or a beer in Norway cost over $20 USD which is complete madness.

Business Insider discussed the Scandinavian economic experiment, where high taxes are applied to goods and services in order to fund a vast social safety net. From the article:

In Norway, a burger and fries at a fast food joint will set you back $23. A six-pack of warm grocery-store beer is nearly $30.
These hefty price tags are due, in part, to high wages for low-skilled service jobs. But high taxes play a role too.
Most products have a 25 percent value-added tax, which means that $5.50 of the cost of that burger goes to fund Norway’s generous social programs.
As a visitor, you get little for the added price. But, as a resident, your daily spending helps to fund an expansive package of benefits, including health care, child care, high-quality education, pensions, and unemployment insurance.

Some are now proposing this high-cost method, with large taxes embedded in everyday prices, as a solution to the inequity in incomes and wealth that is discussed widely in politics and economics today.

From the perspective of someone who is highly interested in economics and tax policy, my two rules of thumb are:
1) that the tax policy raise the money that it intends to raise
2) that the tax policy not significantly distort economic activity

Any society that implements high taxes such as Norway needs a comprehensive surveillance model in order to collect these taxes. It is difficult to avoid taxes that are broadly assessed on fast food, for instance, because each corporate location will set up cash registers and controls to remit these taxes onto the state. The same types of processes can be installed in liquor stores, formal bars and nightclubs, grocery stores, and restaurants.

In a less-homogeneous society such as the USA, we already have major problems with tax evasion on cigarettes and likely liquor, and these are in responses to our sales taxes. The problems would be compounded if we placed value added taxes on all goods at a higher level and on services such as restaurants, hair care, etc… Smuggling would become rampant and informal or barter methodologies would increase in size and scope. These sorts of costs would have to be applied across the USA or some areas would become uncompetitive and see an out-migration of economic activity, starting with incremental additions (no one has opened a new manufacturing plant in Illinois in years, for instance) and eventually leading to the lock, stock and barrel out migration of existing industries (such as the exodus of car manufacturing out of the Midwest and California to the American South).

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Emmanuel Todd, Speaking in English, on Why the Euro is a Failure

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Todd applies his family structure analytic model to explain why the Euro is doomed to fail. He notes that the French and the Germans, for example, have little in common. He expressly says that the French individualism is much closer to the Anglo-American individualistic culture, distinct from the German authoritarian style. He says that the French elite caused the problem and they cannot admit their mistake or the entire foundation of the French political structure would collapse.

The European idea of a union of free and equal states has been destroyed by the Euro, and it is now an economic hierarchy, with the Germans at the top. Further, democracy itself is incompatible with the Euro.

Todd notes that the very low birth rates in Europe have a positive benefit: There will be no open or violent conflict to resolve the current political conflicts. Rather, contentious issues are kicked up to the “European level” — which means nothing whatsoever will happen.

He sympathizes with the British position. Britain is dependent on a dying content, Europe. “It is committing suicide under German leadership.” But Britain is part of a much larger Anglo-American world, which in ten years, on current trends, will have more people than all of Europe.

Of course, America 3.0 is based in large part on a “Toddean” understanding of American culture, and this talk is consistent with our understanding.

A fascinating talk.

H/t Brian Micklethwait

Picketty’s Introduction

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Thomas Piketty has written a monster of a book, Capital in the Twenty-First Century. I find myself in strange agreement with Brad DeLong, that the collective conservative response is weak. I had a patch of time that left me twiddling my thumbs waiting for some pretty long database operations to finish over the past four days. So I went and decided to fisk the book. I just finished the introduction. It took four posts, Part I, Part II, Part III, Part IV and overran the spare time I had available from a database import and indexing task by about 12 hours.

Now I know why the criticism is so weak. Piketty is a target rich environment and doing a line by line analysis is simply exhausting. But it’s the only way to be sure.

“Death Stars are overrated military investments”

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Via J. Scott Shipman and Grurray on Twitter:

Real-life performance data shows that the most important and high-impact technologies are not the gold-plated, over-engineered wonder weapons that turn majors into colonels, colonels into generals, and young Jedi apprentices into Sith Lords. Instead, data suggest the real winners are humble, simple, low-cost products made by small, rapid innovation teams — the type of projects that don’t attract much attention from the press or from the brass because all they do is get the mission done without any fuss.

Read the whole thing.