Ten Things Every Debater Should Know
#1 TANSTAALF
"There Ain´t No Such Thing As A Free Lunch", the saying goes. There is a cost of obtaining any good thing in this world. It may not be a money cost, and the recipient is not always the one who has to pay it, but there is a cost to someone all the same -an opportunity that is sacrificed to make that good thing available to the recipient. The reason is that good things are scarce in society -there isn´t as much of them as people would like to have. To employ scarce resources to provide a good or service of one sort leaves less for producing others. This is all right if the good produced is more valuable than the goods sacrificed. Otherwise, it´s trading good for bad. Tradeoffs are everywhere and arguments are often won or lost depending on who is the best at identifying the relevant tradeoffs for a particular situation.
Politicians and special interest groups are renowned for acting as though scarcity can be repealed by an act of the legislature. Watch for it in your research. Listen to evidence and you will hear the tell-tale signs. The argument will go like this: (1) X is a good thing; (2) There is not enough X; Therefore, (3) a law to increase the amount of X is a good thing. Case in point: The War on Drugs. Here the argument is (1) Drugs are bad; (2) Tougher drug enforcement reduces drugs; Therefore, (3) getting tough on drugs is good. What elements of scarcity are overlooked here? Well, police, courts, and prisons, to name a few. Leave aside the debatable assumption in (2) that drug enforcement actually reduces drug use. If the time and resources of the justice system are devoted to arresting, convicting, and punishing drug dealers this leaves less time and resources for bringing murderers, rapists, and armed robbers to justice. The 60 percent of federal prison space that is occupied by mostly non-violent drug offenders today is space that is not available for violent criminals2. Courts that once had high conviction rates for violent offenders now are clogged with drug cases and plea-bargaining is increasingly common. Meanwhile police spend time chasing dealers while more murder and rape cases go unsolved. Not surprisingly, higher drug enforcement expenditures correspond directly with higher rates of violent crime. Even if we achieve lower drug use, at what cost? There´s no free lunch.
The privacy debate topic is one where trade-offs abound but are frequently ignored in public discussion. One example is the way public opinion polls are used to justify tougher privacy protection. People polled about whether they are are concerned about invasions of their privacy by businesses, governments, or individuals who collect personal information, overwhelmingly answer that they are. It is not at all clear from this that stricter protection of privacy actually is in accordance with peoples´ values or concerns. Basing policy on such polls is similar to finding out that 95 percent of people surveyed would like a better car and then instituting a program of heavy taxation to finance new cars for everyone. Wanting a better car is one thing. Having to pay the cost is another altogether!
The increase in surveillance and accountability in modern society may be an annoyance at times, but a society where there are many watching eyes is also one where criminals and police are less likely to get away with bad behavior. Regulating the capacity for people and organizations to watch each other can reduce accountability in a society where it is sometimes easy to prey on others without fear of detection. When privacy is ranked as a concern with other public fears, such as the fear of crime or government corruption, it falls far down on the public´s list, illustrating that the cost of many policies that increase privacy may be higher than the benefit.
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#2 Incentives Matter
A common assumption underlying many policy proposals is that human behavior is somehow fixed, regardless of the new circumstances the policy would put in place. Economists, on the other hand, emphasize that human behavior by and large is the result of choices among alternatives. Any change in the alternatives available or the relative attractiveness of those alternatives will have an effect on peoples´ choices. Incentives do matter.
Experience bears out the importance of incentives for altering behavior. When Congress raised the tax on luxury goods like yachts, private jets, and fur coats they were shocked to learn that the higher tax reduced the revenue generated rather than increasing it. Faced with a higher effective price on these goods, consumers of luxury goods sought out substitutes (leasing their jet instead of buying, refurbishing the old yacht, wearing more cashmere and less fur). In the end the demand for these goods was so much lower that the taxes collected didn´t even cover the cost of the additional paperwork. This is an illustration of the "Law of Demand" in operation: the price of a good and the quantity demanded are inversely related.
When Congress strictly designated strong encryption technology as "munitions" that could not be freely exported out of the country, their intent was to prevent American technology from falling into the hands of terrorists or other criminals that might use it to hide communications about their activities from law enforcement officials. They gave little thought to the ways this changed incentives for producers of domestic computer software. Encryption technology today is included in almost any software that involves internet transactions or communication. While some companies could afford to make two versions of their software -one with strong encryption for the American market and another with weaker encryption for the export market- others could not do so profitably. By raising the cost of marketing new internet applications, Congress imposed disincentives against entering this market and gave the economic advantage to foreign software makers. Today, it is widely recognized that foreign software manufacturers have closed the gap in the market for encryption software and ended any superiority that American products once enjoyed.3 Harder to see are the American software products that were never produced because of reduced market incentives.
3 See www.cato.org/pubs/briefs/bp-042es.html
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#3 "Hazlitt´s Lesson"
Henry Hazlitt, probably this century´s greatest journalistic expositor of the economic way of thinking wrote that:
The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.4
He went on to say that nine-tenths of the economic fallacies that work harm in the world today are the result of ignoring this lesson. While Hazlitt´s Lesson is not exactly a separate economic principle, it is a form of mental discipline that must be exercised when constructing or analyzing policy. The Gwartney and Stroup book provides excellent examples of how rent control laws destroy urban housing, protective tariffs and quotas harm American consumers and workers, and jobs programs fail to create a single job overall. In each case the counter-intuitive result is found by consistent application of Hazlitt´s Lesson: look not just to the immediate effects on one group, but the long run effects on all groups.
Hazlitt´s book, Economics in One Lesson, is still one of the best examples of the economic way of thinking put into practice. Each chapter of only a few pages traces the surprising, but inescapably logical effects of a different government policy and explains why "the law of unintended consequences" has so plagued interventionist attempts to control the economy or engineer society. More often than not, the harm of these policies falls not only on people who were never considered at the time, but on the supposed beneficiaries of the programs.
Debaters and extempers are advised to spend time with each of these books to get a feel for the way Hazlitt's Lesson is put into practice. Examples are the best teacher, here. A few words of practical advice: use three ideas to help you think of unintended consequences that your opponents may not have: opportunity cost, substitutes, and competition. Opportunity cost reminds you that when government creates a beneficiary somewhere there is a cost being paid. Who pays it and how does it affect their choices? The idea of substitutes reminds you that people are born circumventers -close off one avenue or make it more costly, and they will leave that activity and switch to another. How will this adjustment affect other people? Competition reminds you that helping one group harms others that compete with that group. (This, by the way is a useful consideration not only for analyzing the impact of policy, but for evaluating the credibility of evidence sources!)
Today there is great concern about the ease with which medical records can be accessed through computerized networks by people who have no business knowing this sensitive information. Confidential medical information is gathered and consolidated into vulnerable centralized databases partly as an unintended consequence of government policy concerning health insurance. For decades, tax policy has rewarded people who pay for health care through employer-provided health plans and punished them when they pay out of pocket. Employers rationally substituted generous medical benefits for monetary pay as a way to compete for good employees. Soon more than three fourths of all health care spending was paid not out of the pockets of patients, but by third-party payers -insurance companies and government.
When the opportunity cost of visiting a doctor or getting the most costly treatment for a problem was low because someone else was paying, patients tended to make unnecessary trips to the doctor and doctors provided unnecessary treatments. Insurers´ natural response to this behavior was to impose restrictions that regulated and rationed the kind of care that would be covered, and to require doctors and hospitals to document their compliance with these rules. Only then did medical records become data to be entered into centralized computer databases, a practice generally resisted by the medical profession.
Although Hazlitt´s law is the basis of the economic way of thinking, it provides a useful framework for evaluating foreign policy decisions as well. No where has the "law of unintended consequences" been more distressingly apparent than in American foreign policy since World War II. As we consider expanding the membership in the North Atlantic Treaty Organization (NATO) to put ever more of Europe under the protective umbrella of American and European military forces, we would do well to consider the way such alliances have worked out in the past. The history of post-war U.S. foreign policy in the Middle East illustrates what happens when we fail to look to the long term and to the consequences for all groups.
In 1953 America allied itself with the Shah of Iran to help him overthrow the government of Mohammed Mossadegh and preserve (we thought) security in the region -security for access to its oil and against Soviet influence. Failing to consider the hostility this act might foster against America, the U.S. watched with dismay as a revolutionary torrent built up in Iran converting it´s strategic alliance into a violent cauldron of anti-Americanism. By 1979 the Islamic fundamentalist revolution of Ayatollah Ruhollah Khomeini had swept the Shah out of power and taken Americans hostage in the U.S. Embassy in Tehran.
Within a year, Iran went to war with neighboring Iraq, a centuries-old rival. In the early 80s America formed a new de facto alliance to "correct" the errors of the last -this time providing critical aid and legitimacy to Iraqi leader Sadaam Hussein. With the help of the U.S. and American allies who armed Hussein with fighter planes and missiles, Iraq was to become the world´s new guardian against Muslim fanaticism. Yet, two years after Iran accepted a cease-fire from Iraq, the huge military establishment that Sadaam had built during the conflict was used to invade Kuwait. To protect the secure flow of Arab oil, America went to war with Iraq, which had been a de facto ally only a few years before.
Since the Persian Gulf War, the U.S. military presence on the soil of Arab allies such as Saudi Arabia has ignited still more hostilities from forces opposed to the American-friendly governments there. The recent devastating bombing of the U.S. Embassies in Tanzania and Kenya were apparently organized and funded by Saudi Osama bin Laden in retaliation against U.S. military presence in his country. While nothing can excuse such acts of terrorism, the failure to understand their origin in America´s penchant for "entangling alliances" can only ensure repetitions of this sad history.
In considering the question of enlarging NATO are we taking into account the long-range effects this might have on conflicts in which our new allies could easily become involved? With Bosnia-style ethnic conflicts already brewing between Hungary and Serbia, the loose cannon of Russian-backed Belarus on Poland´s flank, and Russia itself touchy about the proposed encirclement of its Kaliningrad enclave by an expanded NATO, security commitments in this region have all the dangers of our Middle East alliances of the past. But where the stakes in the Middle East were mainly about oil, in the Russia/NATO interface there is an even greater concern: the vast, poorly controlled nuclear arsenal of a highly unstable ex-superpower.
4 Henry Hazlitt, Economics in One Lesson, 1979, p.17
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#4 Private ownership promotes responsibility and cooperation.
Private ownership is one of the least understood institutions of the free society -a fact that can be of enormous value to debaters and extempers looking for a fresh, unexpected angle on an issue. Many people assume that since ownership entails the right to use property as one sees fit and to exclude others from using it that private property is anti-social and dangerous. A resource that is owned by a private individual (rather than commonly owned, or government-owned) is subject to whatever capricious idea that person might have about its use. The public has no recourse to prevent irresponsible or even dangerous uses of resources when property rights are consistently defended, the argument goes. From there the argument continues that government control is the answer, either through outright public ownership or through regulations that take away some of the property owners´ rights. Economic reasoning shows that this argument gives too little credit to private owners and too much to government´s wisdom and beneficence.
Private property does give owners a degree of freedom but it also makes them accountable for their actions. The owner of a dog is legally responsible for the damage his dog does to his neighbor´s rose garden. The owner of a building is responsible for making repairs if the roof leaks on his tenants. This accountability ensures that property is not used in a way that harms other peoples´ rights.
Consider furthermore that one of a private owner´s rights is the right to sell his resource to someone who values it more than he. This opportunity forces people (both owners and potential buyers) to take into account the value that others place on the property. When natural gas was discovered under the Rainey Wildlife Preserve in Southern Louisiana, the environmentalist group that owned the land considered the commercial value of the gas and sold the right to extract it under tightly controlled conditions.
The environmentalists didn´t care so much about heating homes as they did about the additional wilderness areas that the gas revenue would permit them to buy. Likewise, the gas company that won the bid for the right to drill didn´t develop special extraction technologies with low environmental impact because they loved the wildlife but because they knew that this would increase their chances of winning the drilling rights. Each party had the incentive to cooperate with the other and to take their values into account.
When property rights are not clearly established or property is held in common, the incentives are reversed. This typically results in irresponsible resource use. The water crisis is a good example5 . Farmers who share the water in underground aquifers throughout the Western United States know that the aquifers are being exhausted faster than they can be replenished. Without plentiful ground water, millions of acres of valuable cropland will some day be useless, yet no farmer has much incentive to conserve this dwindling resource. Each knows that his own conservation efforts will be to no avail unless others do the same. Each pays little or no cost for wasteful uses of water. He may as well use the water while it lasts and hope that his children don´t go into farming.
By contrast, if each farmer had a share of the water that was his own, his conservation efforts would be rewarded since he could sell the rights to any unused water to other water users. If water became more scarce the price would increase and the reward for conservation would become even greater. Responsible water use would prevail.
The reckless waste and abuse of commonly owned (or unowned) resources has been dubbed the "Tragedy of the Commons" by economists and is a problem that is evident in some form in almost every area of public policy. Here are just a few examples. Learn to watch for the signs of the "Tragedy" and to trace its cause:
- Housing: Publicly owned housing projects quickly fall into disarray and disrepair since no one has any stake in maintaining them. Apartments that the government deeds back to the tenants are better maintained and the owners take more responsibility for getting involved in issues that affect their building.
- Endangered Species: Unowned blue whales are hunted to extinction while privately owned African elephants flourish in Zimbabwe, despite (or because of?) large profits to be had from the sale of their tusks6.
- Law Enforcement: Much of the time and resources of "commonly-owned" government police is wasted with false alarms, low-priority calls, and functions inessential to providing security. Meanwhile hired private police focus on the crime problems most important to the customers who hire them and charge customers who have excessive false alarms7.
- Wilderness Land Use: Timber companies operating on private land have the highest rate of replanting and sometimes generate extra income by maintaining scenic areas for hunters, hikers, and other sportsmen. Meanwhile companies on public land have the highest rates of clear-cutting and are not allowed to collect revenue from sportsmen
- Health Care: People who pay for their health care out of a common insurance pool spend 25 percent more on health care and are more likely to receive unnecessary treatment than people who spend their own money from a medical savings account. Today only 19 cents out of each dollar of physician´s fees is paid by patients using their own funds. Meanwhile the demand for health care has exploded, and health care costs with it. Countries where all health care is financed out of tax revenues are scrambling to privatize their systems8.
Many of these examples also illustrate the conflict that results when political forces are inevitably brought to bear to control common-pool resources. Political control of resources does not eliminate competition; it only changes it from market competition to competition among political interest groups. Whereas competitors for privately owned resources have strong incentives to accommodate each other (as in the Rainey Wildlife Preserve example), political competition is usually a winner-take-all affair. Political struggles over health care, the environment, and now the legal protection of private, personal information have been heated and sometimes even violent because competing groups have nothing to gain from accommodating each other and everything to lose.
5 See Terry Anderson, Water Crisis: Ending the Policy Drought, Cato Institute, 1983 for a more detailed exposition.
6 See Randy Simmons and Urs Kreuter, "Herd Mentality," Policy Review, Fall 1989, pp. 46-49 7 See Bruce Benson, The Enterprise of Law, 1990 8 John Goodman and Gerald Musgrave, Patient Power, 1992, p. 20
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#5 Trade creates wealth
For centuries people believed that for exchange to occur the goods exchanged must be of equivalent value. Old habits die hard. This is still one of the most common economic fallacies. But the intense interest that people take in trading, whether they trade dollars for a new stereo, or their labor for a paycheck gives the lie to this misconception. With only a little reflection it is easy to see that in every exchange we make we give up something we value less than what we receive... and so does the person we are trading with. Voluntary exchanges benefit both parties to the exchange and this benefit is rightly seen as an increase in wealth for both. Remember, more wealth doesn´t mean "more stuff"; it often means getting stuff into the hands of the people who value it most. Air conditioners in Arizona and space heaters in Saskatchewan.
Exchange creates wealth in indirect ways, as well, by creating the possibility of specialization and division of labor. Most of us would be desperately poor, even to the point of starvation, if we had to produce everything we needed for ourselves. But by specializing in one type of production that we do very well and exchanging that product or service for the other things we need, we can be much better off. Along with the division of labor comes division of knowledge -people gaining specialized knowledge and skills that benefit millions of other people who can be blissfully unaware of how it all comes together. The increased division of labor and division of knowledge are the chief sources of the economic growth that has occurred in human history. And they are only possible because of the freedom to exchange.
The significance of this for debaters and extempers is this: be alert to proposals to limit, regulate, or restrict free exchanges between people. Many a nation has choked off economic progress and trapped its people in poverty by imposing a morass of regulations, licenses, permits, taxes, and fees on every type of transaction. Gwartney and Stroup use the extraordinary example of Peru as a nation whose economy has stagnated under the weight of bureaucracy and regulation, yet the U.S. may be almost as good an example. Economist Thomas Hopkins has estimated that the current cost to the U.S. economy of government regulations is over $500 billion per year 9 . Tariffs and quotas on imports alone cost consumers $80 billion a year -over $1,200 per family10. These trade restrictions destroy American jobs by reducing the dollars available for foreigners to purchase American exports and by leaving consumers with less money to spend on other things.
Licensing restrictions and regulations on small business have especially hurt minority and low-income entrepreneurs by blocking entry to markets where they can sell their goods and services. Rationalized in the halls of government as a protection to consumers, these restrictions are mainly backed by businesses who fear the competition of new entrants that might provide better service or a lower price. Minimum wage laws, too, reduce the demand for low-skilled labor and close off economic opportunities for young people just entering the job market. Trade restrictions that impact people with low skills and low income are doubly costly in that they drive disappointed job-seekers into the welfare system and add to the burden of taxes in the economy.
Discussion about the way internet merchants track peoples´ buying patterns and share this information with each other rarely considers the benefits of this practice for the expansion of free trade and competition in the economy. The growth in the capacity to instantly relay crucial information for better serving consumers has been a substantial factor in the long period of prosperity we have enjoyed over the last two decades. The capacity for a new business to gain a list of likely customers to offer its services to improves the odds that that business will succeed in the market. Consumers benefit from the free exchange of accurate information about their desires because they are thereby approached by more businesses whose products and services interest them, and fewer that do not. Regulating such exchange may make some privacy advocates happy, but it is likely to chill the growth of the new economy and harm both business and consumers in the process.11
In short, every policy that restricts free trade, free contract, or free entry into the market diminishes wealth for individuals and the nation as a whole.
9 Michael Tanner, Cato Handbook for Congress, 1995, p. 181. 10 James Bovard, The Fair Trade Fraud, 1991, p. 5. 11 See http://www.cato.org/dailys/12-13-99.html for evidence of this.
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#6 Profits direct businesses toward activities that increase wealth.
"Profit" is often considered to be a derogatory term today, especially when it´s referred to as a motivation for human activity. It is fashionable today to talk about the need for business to temper its pursuit of profits by being more socially or environmentally conscious. The concern that business people behave responsibly and with all due awareness of the ways their decisions affect other people is certainly noble and good. But the implication that pursuing profit is socially irresponsible is based on economic misunderstanding.
Profits are not snatched from the mouths of hungry children by greedy businessmen, they are earned by people who provide a product or service that other people are willing to pay for. More accurately, they are earned by the people who most creatively and judiciously employ their resources to satisfy the needs of others. The pursuit of profit demands the imagination and alertness to anticipate those needs, and the wisdom to meet them without wasting scarce resources. Even if the entrepreneur´s immediate goal is making money, the economic criterion for doing so is to help others accomplish their own goals.
There is nothing automatic about this process. Many business people suffer losses because the cost of the resources (labor, capital, materials, etc.) was higher than anticipated or they were inefficient in employing them. Others lose money because the demand for the product was insufficient. In all these cases, losses signal the entrepreneur that the resources would be more valuably employed in a different manner. Those entrepreneurs who persist in losing ventures eventually lose their businesses and the resources are freed up for other more socially beneficial lines of production. While sad for the owner who must sell the business, this process is beneficial for the public as a whole since scarce resources are conserved for only the uses that consumers value most highly.
"Corporate downsizing," the practice of trimming excess workers and managers from company payrolls to lower costs and increase profitability, is often described as a symbol of weakness or corruption in our economy. This is because people judge only by the obvious visible consequences without tracing the invisible ones -they ignore Hazlitt´s Lesson. What is seen are people losing their jobs. What is not seen are the new goods and services which the economy can now produce because this valuable labor and know-how is available for starting new businesses. This is one reason why this period of corporate downsizing has corresponded with very low rates of unemployment, rapid innovation, and low prices for consumer goods.
Internet businesses have been vilified of late for trampling consumer privacy by tracking consumer behavior and sometimes sharing the information with other businesses. The fact that some of this is actually beneficial, on balance, to consumers has already been discussed. The more interesting story, perhaps, is the extent to which the profit incentive has forced businesses to regulate their own use of consumer information and offer convincing assurances that they are respecting the privacy of consumers who are sensitive to this issue. It is the interest in profit that has drawn software companies into the market for technologies that afford greater privacy protection, not just a sense of moral obligation to the public. Profits encourage people to cooperate in providing what other people want and are willing to pay for.
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#7 Competition increases efficiency and innovation.
Competition is a source of discipline in the market, or in any social organization for that matter. Producers who are earning profits for the time being can rarely afford to rest on their laurels. A single new entrant producing a better, cheaper product can turn those profits to losses very quickly. As long as entry into the market is open, competition (actual or potential) ensures that entrepreneurs stay on their toes by constantly increasing efficiency and finding new, better ways to produce. It is the producer´s perpetual "reality check."
When competition is reduced by legal restrictions, regulations, tariffs, or quotas market discipline is partially suspended. Efficiency, innovation, and quality of service are reduced since they are no longer as necessary for the protected industry to stay profitable. When the author moved from Wichita, Kansas to Houston, Texas he learned this lesson first hand. In Wichita, trash collection is a competitive industry. Dozens of local companies offer subscriptions to pick up residential waste. The fact that a dissatisfied subscriber can make two phone calls and change her trash company has resulted in low prices, and excellent service. Companies provide and maintain free 90-gallon trash barrels with sturdy wheels and hinged tops. On trash day (twice a week) they come up to the house to get the barrel and take it out to the street. Most services pick up almost any kind of trash that is left for them -even large appliances!
In Houston, by contrast, the city maintains a legal monopoly in residential waste pick-up. Competition is forbidden. No barrels are provided. In fact, Houston trash collectors won´t touch trash barrels of any kind -all trash must be placed by the resident in plastic bags at the curb. What about heavy items that won´t go into bags? Houston residents must remember to put those at the curb on a particular day that comes once each month. Sometimes the city will pick them up then. If not, haul the stuff back in the garage and try again next month!
Competition is one of the most important reasons why the market is superior to government as a system for producing goods and services. Those who fear that economic freedom will allow producers to take unfair advantage of people often neglect this fact and call for industries to be tightly regulated or taken over by government. As a rule, these government-run industries are inefficient, costly to taxpayers, and far less innovative than private firms operating in a competitive environment.
Privacy regulations may be a serious threat to competition if they limit the capacity for new entrants to the market to gain critical information about consumers and prevent them from playing profitably on a field where established firms are already quite dominant.
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#8 Taxation and regulation discourage production and destroy wealth.
How hard we are willing to work depends on how much we are offered in pay. Incentives matter. Taxes lower our incentive to work just like a reduction in pay, since that is exactly what they are. If allowed to keep only half of every dollar we earn, alternatives to working for money begin to look more attractive. Some people will work less overtime and enjoy more leisure, some will find non-taxable work in the home (and stop paying daycare and cleaning people), some will retire earlier, etc. Businesses whose income is heavily taxed may withhold undertaking new ventures since the share of the profits they are allowed to keep doesn´t justify the risks. Investors, too, find alternatives to putting their money to work in a high-tax environment: they invest in countries where the tax rates are lower or they simply consume more of their surplus income. All these choices illustrate that high taxation discourages productive activity, and thereby reduces the wealth that is created in society.
Equally important for the general welfare is the fact that taxation diverts enormous amounts of time and resources into non-productive activities. Businesses and individuals spend billions of worker-hours each year (in America, 5.5 billion, to be exact12) just completing taxation paperwork. This includes the wasted talent and labor when lawyers and accountants are hired to find legal and not-so-legal ways of sheltering income from the tax collector. These jobs in the tax industry create no wealth for society as a whole, rather they deprive us all of the valuable services these individuals could be producing for the market. The higher the tax rate, though, the more people hire such experts to help them.
Tax cuts reduce the percentage of income government collects, but because of the stronger incentives to produce they also increase the tax base (the total amount of taxable income generated in the economy). This means that cutting tax rates doesn´t necessarily reduce the revenue government takes in. When taxes are very high, tax cuts have even increased total tax revenue, thanks to the economic growth produced. This is not "voodoo economics" -it is just common sense. Consider that if we were taxed at a rate of 100%, government revenue would be almost zero since few people would bother working for money knowing they would receive no take-home pay. Tax cuts from that level and from levels substantially lower would obviously increase income-producing activity, and tax revenue along with it. Significant tax cuts
during the Kennedy and Reagan administrations were attended by increased tax revenues in the years that followed, just as this theory would predict.
For debaters this means that raising taxes is a questionable option for funding plan mandates! For everyone, the economic reasoning provides a framework to assess conflicting claims about taxes within the media.
A fascinating side-effect of technology for protecting the privacy of economic transactions is that it may vastly reduce government capacity to tax and regulate these transactions. In a society where a large proportion of goods and services are bought and sold over the internet, shielded from view by strong encryption technology, how will income or sales taxes be enforced? Some economists have argued that the expansion of consumer privacy on the internet via encryption will result in a radically freer economy and a smaller, less powerful government. If so, the potential for people to produce wealth through production and exchange could be significantly increased. Critics fear that criminal activities, too, might be more easily hidden from view, making economic plunder a more successful strategy, but technology may provide protection against this form of predation as well as from excessive taxation and regulation.13
12 James Gwartney and Richard Stroup, What Everyone Should Know About Economics and Prosperity, 1993, p. 76
13 See an online version of economist David Friedman´s intriguing article, "A World of Strong Privacy: Promises and Perils of Encryption" at http://www.best.com/~ddfr/Academic/Strong_Privacy/Strong_Privacy.html#Crypto-anarchyBack to "What Every Debater Should Know" Overview
#9 Political decision-making favors plunder over production.
The great French political economist, Frederic Bastiat, wrote in 1850:
Man can live and satisfy his wants only by ceaseless labor; by the ceaseless application of his faculties to natural resources. This process is the origin of property.
But it is also true that a man may live and satisfy his wants by seizing and consuming the products of the labor of others. This process is the origin of plunder.14
Bastiat went on to say that the purpose of law is to protect property by preventing people from using plunder against each other. This is a pretty important function. For one thing, the entire market economy is based on this foundation of secure property rights, which creates strong incentives to produce and to cooperate through peaceful, voluntary exchange. Preserving this fabric of civil society by protecting individual rights is usually the primary reason people give for having a government with the legitimate right to use force.
But governments often do much more than protect people from plunder and coercion. Government´s power to tax can indeed be used to pay for police, courts, and military defense but the same power may be used to dispense other benefits. To someone who can influence the government, its power can be a tool for gaining access to other peoples´ property. Bastiat called this "legal plunder" and argued that it was no more just and no less destructive than the criminal plunder of a thief. If people can compete for legal access to their neighbors´ wallets and purses through the political process, it will not be long before a government designed to protect peoples´ rights becomes one of the greatest threats to those rights.
Understanding the dangerous incentives inherent in concentrating power in a central government, the founding fathers sought to constrain the government with a binding Constitution. Under the Constitution, Congress was to have only those powers delegated to it as enumerated in the document. "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people." Specifically Congress was permitted to raise taxes to "provide for the common Defense and the General Welfare" of the people, but not for the special defense or welfare of particular groups. Madison and Jefferson insisted that this clause be included as a shield guarding against the misuse of federal powers.
The extent to which the original purpose of the Constitution is today ignored by Congress and the Supreme Court is testimony to the powerful temptation of legal plunder. The majority of the modern federal budget is devoted to the transfer of resources from the taxpayers to various particular groups in society: farmers, industry, small business owners, homeowners, scientists, artists, the poor, the elderly, nature lovers, classical music lovers, even peanut lovers. In fact, government has grown so large with programs for each special interest group that today more than 35 percent of what we produce (GDP) is consumed or redistributed by federal, state, and local governments 15.
A great deal more legal plunder is perpetrated by regulations which protect one group´s economic interests at the expense of others. Labor unions lobby for a higher minimum wage to protect union jobs from competition by cheap labor. Taxi drivers and hair dressers ask for mandatory state licensing to reduce competition from upstart new entrants. And hundreds of domestic industries pressure the International Trade Commission and Commerce Department to impose heavier tariffs on consumers when they try to buy foreign-made goods. Those who benefit most directly by subsidies, tariffs or protective legislation have strong incentives to be politically organized, while the much larger group who share the costs tend to be less vocal. Government officials pay most attention to those who are paying attention to them.
As more of what a people receive comes to them through government and less through their individual labors, this has predictable effects on their productivity. More resources are devoted to plunder and less to production. Living standards grow more slowly, or even decline. Poverty becomes entrenched. International comparisons cited in the Gwartney and Stroup book show that a nation´s economic progress is generally inversely related to the size and scope of its government16 .
For debaters and extempers the lesson here is clear. Be wary of proposals to expand the aspects of our economic lives over which politics has control. Political decision-making delivers the spoils to the groups that are most politically organized (most likely to determine election outcomes). In the free market, by contrast, resources tend to flow to where they are most valuably employed in satisfying consumers. Whereas market competition tends to increase wealth by expanding the range of opportunities available, political competition tends to consume wealth by diverting resources into organized legal plunder. Lobbyists, lawyers, and government relations departments are the private sector counterparts to the government bureaucracies and agencies that spend billions of tax dollars each year directing benefits to various special interest groups.
14 Frederic Bastiat, The Law, 1990, p. 10. 15 William Niskanen and Stephen Moore, Cato Handbook for Congress, 1995, p. 73. 16 James Gwartney and Richard Stroup, What Everyone Should Know About Economics and Prosperity, 1993, pp. 110-112
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#10 Central planning wastes resources and retards economic progress.
Human reason has given us enormous control over our environment. The technology that reason has produced helps to feed, clothe, and shelter us from the cold blasts of nature which kept our prehistoric ancestors huddled and half-starved. With the Enlightenment came the faith that nothing was beyond man´s ultimate capacity to control if reason was his guide. If science could help us design a better bridge, then why not a better society -one that is organized and planned to suit our needs, instead of one where everyone pursues their own disconnected plans in that bewildering, competitive, uncontrolled game called capitalism? As well as we have done muddling along with nothing but profit and loss to guide us, one might imagine that the messy process of market competition would be better replaced by a consciously designed economic system that is rationally planned.
This basic line of reasoning is at the foundation of a great many debate cases, as well as countless real-world proposals for reforming our economy. But as reasonable as its sounds, it is fallacious. In fact it is possibly "The" great economic fallacy of the 20th century; the one that brought us Soviet socialism and German fascism, to say nothing of the untold economic misery of dozens of Third World countries who patterned their policies after socialist governments in Europe. It is also the essential vision behind proposals for comprehensive national health insurance, national industrial policy, social engineering, government-funded scientific research, and all manner of government-business partnerships.
The fallacy of central planning, which Nobel Laureate Friedrich Hayek17 called the "fatal conceit," lies in a misunderstanding of the kind of knowledge required to organize the plans of a large number of people into a successful economy (or health care industry, etc.) The knowledge to construct even the simplest item we use -say, a pencil- is known to no individual on earth. It is dispersed among millions of individuals who neither know each other nor are aware of each others´ activities. Graphite miners, tool manufacturers, forestry experts, mill designers, paint chemists, rubber growers, truck drivers and machine operators each contribute their specialized knowledge to the production process. No central planner could hope to understand even a fraction of the detailed knowledge needed to guide the construction of a single pencil, much less an industry or an economy.
And even if a planner could master this knowledge, how would he go about evaluating which resources should be devoted to which projects in the economy? What would tell him which things are most important or valuable? In a free, competitive market, fluctuating prices signal the value of resources and guide production decisions. If a large chromium mine collapses in Zaire, the American pencil maker is signaled that he needs to substitute paints with non-chromium dyes. How? By the higher price of chromium paint. People with less urgent needs for chromium reduce their consumption without having to know the details -or even that chromium is in the paint they use. Thus, supply and demand generate prices which spontaneously direct resources to the most important uses. Without competitive markets and prices to guide him, the central planner has no way to accurately judge what are efficient uses of resources.
The problem of central planning is deeper still when incentives are taken into account. People who gain resources by virtue of their position in "the plan" rather than by better satisfying consumers tend to have a stronger interest in catering to the planner than to the supposed beneficiaries of their work. The collapse of communism is now widely understood to have occurred because of perverse incentives that rewarded corruption and waste, while neglecting even the most pressing needs of the people.
Centrally planned government programs in America show the same pathologies. Medicaid clinics, paid by the government according to the number of clients they serve, often churn patients through as quickly as possible. Bureaucratically set prices for many Medicaid services are too low to compensate doctors for the liability risks involved, so these services -including prenatal care- are becoming less and less available.18 A pregnant Medicaid patient who is willing to supplement the doctor´s reimbursement with her own money to receive prenatal care or a higher quality of service cannot legally do so since this would defeat the purpose of the plan. Similar irrational results can be found in other "rationally planned" government programs.
For debaters and extempers the principle to keep in mind is that individuals are generally better able to produce, purchase and provide for themselves what they need than even the best intentioned bureaucrat in a remote office. With economic freedom, society tends to spontaneously order itself to maximize peoples´ chances of carrying out their plans successfully. This coordination may seem mysterious -we are trained to believe that where there is order there must be a designing hand that created it. But most of the order and cooperation in a complex society such as our own must be generated in this spontaneous manner, for no designer could ever accomplish the task.