Social Distortion

One of the great problems plaguing American society is something I like to term “social distortion”.  In an effort to keep this blog somewhat separate from any of my previous writings, I’ll rehash it here.

Social Distortion, in my eyes, is an alteration in the natural allocation of resources and effort in a society.  Not all social distortion is a bad thing, and indeed not all economic intervention by the government causes distortion.  However, the sheer amount of distortion afoot in the American economy is staggering.  There is not a single market not somehow shaped by government regulation or manipulation.

In many cases, what the government is doing is creating a market where otherwise none could exist.  That is to say, they are defining property rights in an area where conventional notions of property do not extend well (wireless spectrum, intellectual property, etc.).  This is something that has to happen in a centralized fashion; it might as well be a government that does it because no-one else can necessarily be trusted with it.  (There is a counterargument to this which is perhaps a little more arcane but also an interesting discussion in and of itself, so I’ll reserve it for another post).

In other cases, however, the government is creating artificial subsidies for industries, either directly or indirectly.  This can be as direct as the AAA, TARP, and the like, or it can be indirect, such as Mortgage Interest, Long-Term Capital Gains, Carried Interest, Federal School Lunch programs.  Indeed, it could very well be argued that Medicare Part D is actually the largest backdoor subsidy for any industry ever, since it essentially provided the pharmaceutical industry with unlimited access to government funds.

Now, I’ll be the first to say that I don’t know if these are necessary or not.  Some of the subsidies exist for a good reason (or, at the very least, for a reason that seemed good at the time that they were enacted), and others were intended to be temporary but became permanent.  I can’t say I dislike them but I can say, with full certainty, that we have no idea how the economy would function without them.  The nonlinearities inherent in multiple levels of price supports and consumer subsidies for interacting goods across the entire economy are almost absurdly large.  They’re so large, in fact, that when we tax or subsidize economic behavior these days, we have almost no idea if the tax or subsidy is really necessary – it just appears to be necessary on top of the morass of existing taxes and subsidies that are in place.

At a minimum, we need data.  We need to be able to analyze the functioning of the economy in a relative vacuum.  We need to remove price supports and price controls in any competitive marketplaces, and then analyze resultant behaviors.

This is very important for a number of reasons, not the least of which is that, left to itself, the market will find solutions to problems that we as individuals may not see.  As an example, currently, switchgrass-based biofuels are not economically feasible in the United States because agricultural subsidies artificially depress the price of corn-based ethanol.  Other subsidies depress the price of gasoline.  Left to itself, however, we have no idea what the fair market price of switchgrass-based ethanol would be (or what production processes may be employed) relative to any other fuel.  We believe that it would be cheaper, but we have no way of proving it.  Rather than subsidize it down to a cheaper price, it would be far better to see what an untrammeled market would do, and then decide upon a (short-term) policy prescription to arrive at a more desirable state.

Therefore, the first step has to be taking the economy back to a near-vacuum state.  Let’s walk down a line of reasoning that will achieve this.

First, eliminate all industrial subsidies for all industries.  This includes differential tax credits for certain actions (R&D, Capital Investment). Then, to avoid (in net) reducing employment as a result of this move, remove all corporate taxation. Then, to avoid playing favorites, remove all tax deductions which preferentially favor certain economic behaviors.  (Consumer tax deduction is a subsidy in disguise).  Then, to avoid a net tax increase on the middle class, remove all income taxes.  To prevent reductions in services that may be caused by removals of subsidies, remove all price controls.  Since price controls are needed in noncompetitive marketplaces, tighten anti-trust legislation to make all markets competitive.  Then, to avoid government bankruptcy, replace the personal and corporate income taxes with another tax.

So, we’ve come up with a policy prescription that possibly has a little bit of a libertarian feel to it but seems to contain all of the right elements for ensuring the near vacuum state of the economy.  To be perfectly clear, this is not a state that I this is philosophically correct or anything of the sort.  The objective is to optimize resource utilization across the economy and (secondarily, perhaps) to accelerate technological development, GDP growth, and employment growth.

What is the nature of this “another tax” to replace lost revenue that we speak of?  Well, the obvious solution is a moderate (global) import tariff.  The total volume of imports to America in 2010 was roughly $1.9 trillion while the federal budget was approximately $3.5 trillion.  Simple math suggests a 184% tariff on all imports would handily pay for the entire federal budget.  To cover the costs associated with consumers switching to domestically produced products rather than foreign-made products, this tariff should actually be higher (perhaps as high as 400%), but this substitution effect is not exactly an undesirable behavior.  Indeed, one would hope that this substitution effect becomes more pronounced with time.

Since these policies would have significant impact on the overall structure and function of the United States economy, we must ensure that prices are as free to float as possible.  Therefore, a minimum 2% inflation rate must be enforced (by seigniorage, if necessary)

• Remove taxes on individuals and corporations and subsidies to corporations – Repeal the 16th Amendment to the US Constitution
• Move noncompetitive markets towards full competition – Increase anti-trust enforcement
• Remove price controls in competitive marketplaces
• Implement a 400% global import tariff to replace lost revenues
• Use monetary policy to enforce a minimum 2% inflation rate

These policies will have a nontrivial impact on the United States and world economies, which will be discussed further in posts to come.  At a minimum, we must explore the full impact on the United States and World Economies.  We must also discuss necessary corollary arguments: anti-trust policy, labor policy, social policy, and the nature of the public domain.

Also, as this is the first in a series of posts outlining the platform, it should be noted that this is neither the entirety of the platform nor even the major plank.  It is merely a point of particular relevance given the state of current affairs.