What should Knightean economists do?

Andrew Farrant trawls the archives to figure out what happened when James Buchanan visited Pinochet's Chile.

Although Milton Friedman and Arnold Harberger became involved with Pinochet's Chile in the mid‐1970s, an increasingly influential body of scholarship argues that James M. Buchanan was similarly eager to provide Pinochet's dictatorship with advice. Buchanan reportedly had a heavy influence on the development of Chile's 1980 Constitution and similarly helped to design Chile's binomial electoral system. Buchanan's seeming willingness to advise Pinochet's dictatorship provides a stark contrast to his longstanding advocacy of Frank Knight's view that democracy is “government by discussion” and Buchanan's oft‐repeated insistence that democratic consensus trumps economic expertise. This article draws upon a wealth of largely ignored archival evidence and Chilean primary source material to engage and evaluate whether Buchanan—a Knightian economist par excellence—abandoned his advocacy of “government by discussion” and provided early 1980s advice that helped Pinochet's regime of “institutionalized terror” (Valdes 1995, p. 30) design a constitution that would chain any subsequent Chilean democracy.

So what happened?

Buchanan was invited by the Dean of Universidad Técnica Federico Santa Maria Business School, Carlos Cáceres, for the school's 25th anniversary.

Although Buchanan subsequently told Cáceres that the “tentative arrangements that you suggest for the visit seem fully satisfactory to me” (February 25, 1980), there is no evidence to indicate whether Buchanan was initially aware that Cáceres was a member of the Council of State—an advisory body created in early 1976—which met between November 1978 and July 1980 to review the earlier Anteproyecto de Constitución Política (Preliminary Draft Political Constitution) that the Ortúzar Commission had submitted to Pinochet in October 1978 (Barros 2005, p. 174).

...

MacLean (2017) suggests that the “wicked genius of Buchanan’s approach to binding popular self-government was that he did it with detailed rules that made most people’s eyes glaze over” (p. 159). By contrast, the relatively brief set of outline notes that Buchanan drafted shortly before he traveled to Chile signify that Buchanan thought it “Difficult to know what to talk about … [but I] Propose to do more or less what I did at a lecture in Lisbon, Portugal in November, 1978 … [i.e., provide a] general summary of ‘An Economic Theory of Political Constitutions’” (Chile Lectures 04/28/80, BHA). Although Buchanan noted that “My own work has been, and is, in this, also relevant to Chile (as to Portugal). … ‘Politics without Romance’ … Stick to constitutional issues” (p. 1), he similarly noted the “Influence and importance of Wicksell (on me, on others) … Top rank … Wicksell’s warning to economists [i.e., not provide policy-advice] … Look instead at institutions. How they work” (BHA).18

According to MacLean (2017), Buchanan provided his Chilean hosts with a wealth of
“detailed advice on how to bind democracy, delivered over the course of five formal lectures [Buchanan only gave four lectures to Chilean audiences] to top representatives of a governing elite [e.g., the undergraduates at UTFSM] that melded the military and the corporate world” (pp. 158). In particular, MacLean’s (2017) narrative places much weight on Buchanan’s May 8 lecture to the approximately 250 “government representatives, business people, university professors, and executives” (Que Pasa, May 1980, p. 17) who attended the “Open Lecture and Panel” on “Economics and Public Choice.”

Buchanan’s draft lecture notes (initially written for his May 5 lecture to UTFSM undergraduates and barely revised before he gave his subsequent lecture at the Hotel Carrera Sheraton) signify that his May 5 and May 8 lectures—both titled “Economics and Public Choice”—provided his UTFSM and Hotel Carrera audiences with a substantively identical and fairly basic overview of public choice and constitutional economics.19 Similarly, Buchanan’s notes for his May 6 lecture at the Chilean Naval Academy show that he provided his audience with a basic outline of public choice theory and welfare economics which included a brief overview of the “History” and “development” of the theory of rent-seeking (“Tullock, Posner, Krueger … Export licenses, import. Turkey, India”) and a basic account of the theory of bureaucracy provided by “Tullock, Downs, Niskanen … Bureaucrats and budgets—government growth” (BHA).20

Farrant goes on to note that while MacLean holds Buchanan responsible for Chile's binomial electoral system, "To my knowledge, Buchanan never wrote anything about the binomial electoral system over the course of his lengthy career, and he similarly appears to have made no mention of binomial representation in any of his May 1980 lectures in Chile."

I took Buchanan's Constitutional Political Economy course in 1999 and every graduate course in Public Choice on offer at GMU in the late 1990s and early 2000s. I went to pretty much every seminar at Buchanan House and at the Public Choice Center while there. I don't recall ever having heard the term 'binomial electoral system' before Farrant's article.

Cáceres was certainly no democrat, as Farrant shows. But it looks like Cáceres understood neither Buchanan's work on democracy, nor his constitutional views. And Buchanan's talks had little influence on the constitution then adopted:

Ultimately, the evidence signifies that Buchanan provided his various Chilean audiences with a series of lectures which were substantively similar to the analyses that he provided for any other late 1970s or early 1980s audience. Similarly, the evidence suggests that Buchanan’s May 1980 visit did not particularly influence the subsequent drafting of the Chilean Constitution.

And Buchanan learned a bit about Chile as well:

Ultimately, Cáceres and Ibáñez appear to have had scant grasp of the individualist-constitutionalist-contractarian-democrat—“terms that mean essentially the same thing to me” (Buchanan 1975, p. 7)—tenets of Buchanan’s social philosophy and political economy. As noted earlier, however, Buchanan self-confessedly had little knowledge about the Chilean economy, and he began his May 8 lecture at the Hotel Carrera by providing his audience with a relatively brief summary of his “Week” in Chile. In particular, Buchanan told his audience that he had “Learned more than you have,” and he subsequently told Cáceres that “As I said several times, I learned a great deal” (Buchanan to Cáceres, May 12, 1980). Importantly, Buchanan appears to have learned
much about the anti-democratic views of his Chilean hosts. Indeed, when Buchanan subsequently visited Chile in late 1981, he provided his MPS audience with a steadfast defense of universal suffrage, and publicly upbraided a number of European and South American MPS advocates of the “naïve belief that dictatorships are the only or the best way of establishing a free economy.” Similarly, Buchanan told his MPS colleagues—Cáceres and Ibáñez included—that the MPS had a “moral obligation” to “look for ways of improving democracy” (El Mercurio, November 22, 1981, p. D4).56

The whole article's well worth reading. Here's a Sci-Hub link. Hayek's views on Chile were not admirable, and are discussed.

Farrant concludes:

Consequently, I ask how an advocate of Knight’s view that democracy is fundamentally equivalent to “government by discussion” might best respond when they receive an invitation to visit a country ruled by a dictator. The easy answer is “not go,” but Buchanan accepted Carlos Cáceres’ invitation and subsequently visited Chile in May 1980. Thus I ask what exactly does a self-avowed Knightian economist do when they visit a country ruled by a dictator.62 Do they provide policy advice? Do they meet with the dictator? Do they design a constitution? The available evidence suggests that Buchanan’s answer to the “Frank Knight—dictatorship” question was to do exactly what he would do in a late 1970s classroom in Blacksburg or lecture hall in London.

Afternoon roundup

The closing of many days' worth of browser tabs finds some gems.

• WeWork will be opening an entrepreneurship-focused primary school in New York. 


• Legal entrepreneurship provides a new variant on tax farming in America. One law firm's figured out how to cut a deal with city council letting it prosecute code violations on Council's behalf, and charge those fined for their prosecutions. We don't know how lucky we are in New Zealand.


• Sam Bowman on minimum alcohol pricing. One caution there: Pryce's thesis does show far less price responsiveness among heavy drinkers, but one reason for that is that they shift on the quality dimension rather than the quantity dimension. Minimum pricing makes it harder to shift to lower per-unit-price products in response to a price rise for those heavy drinkers who have already downshifted to low-value products. Pryce does correctly warn that the benefits of minimum pricing in curtailing heavy drinking are highly overstated - the stupid models have a baked-in assumption that heavy drinkers are more price responsive than moderate drinkers, and that has things backwards.


• Marco Tabellini finds voter backlash against immigrants despite immigrants' increasing employment among natives. He looks at European immigration to the US from 1910 to 1930. From his abstract:

  Immigration increased natives employment and occupational standing, and fostered industrial production and capital utilization. However, it lowered tax rates, public spending, and the pro-immigration party's (i.e., Democrats) vote share. The inflow of immigrants was also associated with the election of more conservative representatives, and with rising support for anti-immigration legislation. I provide evidence that political backlash was increasing in the cultural distance between immigrants and natives, suggesting that diversity might be economically beneficial but politically hard to manage.

  Sounds like the last NZ election.


• This is just amazing. Here's some folks at Laurier University in Canada berating a TA for a critical thinking course for having encouraged critical thinking. She showed video clips on two sides of an issue. The one that she's in trouble for using was a clip from a University of Toronto professor. The cultural revolution has hit Canadian academia. May New Zealand continue to be immune.


• Another sledgehammer taken to Nancy MacLean's Democracy in Chains. This one hits on her allegation that James Buchanan supported school segregation. He didn't.  

And a couple bits from me:

• I'm quoted in this piece where I argue the case for Working for Families instead of minimum wage hikes. 


• I provided Interest's Top 10 last week. Highlights there include a nice NYT piece on the alcohol-cancer studies, a great piece from Russell Brown on how Auckland Council's liquor people screwed up a Lorde all-ages show, and Dunedin's impending problem where the Easter trading ban will coincide with an Ed Sheeran concert. 

Afternoon roundup

The notables from the lunchtime closing of the browser tabs:

• Nancy Maclean thinks there's some kind of Koch - George Mason conspiracy to subvert democracy. To make her case, she misquotes Tyler Cowen and James Buchanan in ways that reverse the meaning of what they'd written. And here's more on Buchanan and racism. John Small takes issue with my liking James Buchanan; I don't trust a single thing in MacLean's book to be accurate, so I see no reason to go through the book and debunk it. 
• Seattle's $15 minimum wage reduced earnings among low-wage workers by cutting their hours. Here's the NBER paper.
• Dave Lane has an interesting suggestion: get tech students in high schools to provide the tech support. 
• Ontario has a messed up alcohol system. The Liquor Control Board runs all retail sales of hard liquor, and they're up against the Ontario Public Service Employees Union. One union's fight with one government monopoly retailer almost shut down Ontario's access to the good stuff. One might expect that unions have inordinate bargaining power in that kind of scenario. 
• Tim Harford has a great roundup on intellectual property issues. 
• The usual suspects are mad that there isn't a ban on having cartoon characters on cereal boxes. I don't know how you explain rising obesity with a fixed effect: cartoon characters have been on cereal boxes at least since the 1970s. Mum generally refused to buy the ones with the cartoon characters, taking it as a signal that they weren't as good for us. I can still hum the tune from the ads for Count Chocula and Frankenberry though. 
• Does inequality hurt economic growth? Maybe in less developed countries, otherwise not. Note too that where the route to riches is rent-seeking, you expect more inequality and less growth. 
• America moves a step closer to enabling supersonic passenger transport. Letting supersonics conform to the noise restrictions on older subsonic planes rather than the requirements on new planes would reduce fuel burn by allowing more aerodynamic engines. New Zealand should do the same if it wants to be ready when the new generation of supersonic passengers planes is ready. 
• Decentralisation doesn't work as well without fiscal equalisation. I liked this piece in National Affairs. I'll likely use it in the coming semester's Public Finance course I'm teaching at Victoria University. 

The Status of the Status Quo, NIMBY edition

Can we ever change the status quo and know that we've not done harm?

I had an interesting Twitter exchange with David Seymour and Jim Rose the other night. I'd characterised Epsom as a millstone for any aspiring liberal party in New Zealand. Epsom voters, or at least enough of them, strongly oppose that any of their neighbours be allowed to build anything anywhere: no subdivision, no townhouses, no apartments. Seymour's maiden speech, which I otherwise generally liked, included this bit:

Our communities are leafy and our schools prestigious. If people want more Epsom the answer should be to create more Epsom. More good schools, more good suburbs.

But the opposition would cram more people into smaller denser dwellings, changing the character of our communities and putting intolerable pressure on burgeoning school zones.

I totally support building more suburbs. But you cannot build more Epsom where an essential part of it is location: close to amenities and downtown. The only way of having more Epsom is building more in Epsom.

Maybe some parts of Labour or the Greens would support approaches that would force densification by banning development on the outskirts of town, but simply allowing property owners to decide how to use their land isn't cramming more people in, or at least not beyond that which those residents would voluntarily choose. A neighbour down the road putting up a townhouse does not force you to cram more people into your house. And neither does an apartment two blocks over. And while there can be pressure then on local schools, the better response is to expand the schools. It's not like Epsom voters own or pay for the schools: schools are covered out of everybody's income taxes and GST, not just current Zone residents' taxes.

In the later Twitter chats, David re-emphasised that neighbours do have a property right in each other's land use, and that Coase could solve.

@EricCrampton both do, question of extent.
— David Seymour (@dbseymour) October 22, 2014

I agree with David that, because our consenting processes give many many people veto rights over others' developments, or at least the right to impose hassle and cost on anybody wishing to develop, there are de facto property rights in others' land use. That's one reason that it's important to find ways of paying off the losers to encourage that change can happen. But I'm very pessimistic that Coasean solutions can obtain where the starting point is that just about anyone can deem themselves to be an affected party and object to a change in land use.

Coase makes the important point that externalities are two-sided and that the efficient solution can obtain where parties can negotiate: whether I have the right to subdivide, or my neighbour has the right to block me, we'll get to the efficient solution either way so long as property rights are clear and we can bargain reasonably. If my subdivision annoys my neighbour more than it benefits me, then either he'll block my subdivision attempt if he has the right to do so, or he'll pay me to not subdivide if he doesn't.

These Coasean solutions are limited by the extent of transaction costs. When transactions costs are high, the allocation of default rights matters. Suppose that my subdivision is worth $1000 to me and annoys each of 10 neighbours by $150. If my neighbours cannot easily get together to pay me to not subdivide, then I subdivide if I have the right to subdivide, and I don't if they have the right to block me. Default rights then matter. Conversely, if my subdivision is worth $2000 to me and annoys each of my 10 neighbours by $150, they will block me, if they have the right to, unless I find some way of transferring at least $150 to each of them.

In the higher transaction cost case, we aim to set the property rights such that the nuisance is avoided at lowest cost. Is it simpler for affected neighbours to get together and negotiate a package to pay someone not to develop, or for the would-be developer to find all of the potentially affected neighbours and negotiate a package deal with them to let him develop?

If the number of affected neighbours is fixed rather than variable, then the solution on either side very likely involves option contracts or dominant assurance contracts. Consider the case listed above, where the development is worth $1000 to the developer and aggregate nuisance is $1500. In that case, if the developer has the right to develop, one affected neighbour could write the following contract:

I agree to pay $130 into a common pool to pay the guy down the road to put a covenant on his house against further subdivision, but only if each of the 10 affected neighbours, including me, signs onto the deal. If we don't all sign on, then the deal doesn't go ahead.

That's called an assurance contract. And if we worry about free-riding, we can use a dominant assurance contract: the most aggrieved neighbour (say a guy who experiences costs of $200 instead of $150) agrees to pay each of the others $5 to sign the assurance contract.  Everybody signs, then they buy the covenant restriction on the neighbour, and the inefficient development is stopped.

Flip is around now to have an efficient development but veto rights being held by the 10 neighbours. I would use an option contract in that case: go around to each of the 10 neighbours and offer them the following contract:

I will pay you $5, right now, if you promise not veto my subdivision. If I do subdivide, I will pay you an additional $160. If I do not wind up subdividing, you get to keep the $5 for having signed on.

Each neighbour is paid more than the cost of the development to him and gets a $5 signing bonus. Hooray! We get the efficient solution. There are transaction-cost reducing contractual forms.

Unfortunately, the mess is more intractable than that. We do not have a fixed pool of potential veto players. Any number of heritage advocacy groups could emerge to object, for instance, and they don't even have to be based in the local community. The emergence of veto players is then endogenous to the expected returns from objecting. In other words, if you expect that somebody might pay you off for not blocking, then you might just get people getting into the blocking business. We can also imagine endogenous entry into the subdividing business: if I just saw my neighbours pool together a pile of money to block the guy down the road from subdividing, I might start making noises about wanting to subdivide in order to extract similar payments, even if I had no interest in subdividing.

In that case, and if we follow a Coasean logic, we set the rights to minimise this kind of entry. Part of the solution is limiting the number of persons with legal standing to object, but that begs the question when the matter at hand is who should have the property rights. It is cheap and easy to object to things: entry into the objecting business is simple. Making credible threats of subdividing or putting up an apartment building are harder. You need to get a whole pile of planning documents together, get architectural plans for the new buildings, start the building consent process. It's far more expensive to get into the building-as-rent-extraction business than to get into the blocking-as-rent-extraction business. And so the default rights should lie with the property owner.

We also have the very serious problem, where entry is endogenous, of potential over-extraction. The assurance contract set-up, and especially the dominant assurance contract set-up, avoided that by getting ex ante agreement among the affected parties on the scale of the request. If you shift to individual one-by-one negotiated payments to each of the veto players, because more veto players can emerge endogenously, you risk that the sum of the extraction requests exceeds the value of the development project, even if the real costs of the project are less than the benefits: each party over-plays his hand and sinks the bargain.

I consequently argue that the Coasean logic points pretty strongly towards a right to develop rather than a right to block. I however agree with David that the status quo is otherwise. And so we then come to the status of the status quo.

When I argue against Canadian dairy subsidies, I suggest that we need to pay off the losers to make it happen. This isn't because I have inordinate sympathy for Canadian dairy farmers who have effectively stolen from Canadian children for decades: the value of their dairy permits is really the capitalised value of annual theft. It is because I recognise that you can't manage it unless you pay off the losers.

James Buchanan made a similar point in his classic The Status of the Status Quo.

Buchanan says the only norm is agreement; we can't use an efficiency norm. And the only way of getting agreement is to compensate the losers, turning Kaldor-Hicks moves into Pareto moves. In Buchanan's framework, the positive economist begins by identifying things that look inefficient, then moves into thinking about compensation frameworks that allow change to happen.

While economists may well look to compensation regimes for buying out Canadian dairy farmers, or owners of taxicab medallions, it would be rather perverse for economists, or classical liberal non-economists, to spend a lot of time decrying any attempt to liberalise agriculture, or taxicabs, or housing, because of the implicit assault on de facto property rights. If the justice system failed to prosecute theft under $1000 because of the transactions costs, then a technology change made it efficient to prosecute theft in the $500-$1000 range, we would not spend a lot of time bemoaning the de facto right that thieves held in theft under $1000. If thieves were sufficiently politically powerful that we had to pay them off to make the change, we could recommend that, but we'd hardly spend all the lead-up time working to strengthen the thieves' bargaining position in the later political negotiations.

Buchanan takes a principled epistemic position here:

The Pareto construction may, of course, be translated directly into the Wicksellian approach (Wicksell, 1896) already outlined by making agreement the only test for determining whether or not any proposed change is Pareto superior. There may be normative properties of the set of compensations that might be required to secure agreement on proposed efficiency-enhancing shifts in constraints – normative properties that the observing political economist might, in some personalized way, abhor.

Straightforward "taking," as opposed to compensation aimed to secure agreement, may seem preferred, and especially if the positions in the status quo seem to be "ill-gotten." Nonetheless, a too-early or too-eager intrusion of external and independent value norms into the discussion will serve only to reduce the usefulness of the whole Wicksell–Pareto construction, which, as noted, remains value free save for the minimal normative weight assigned to the individualistic presupposition.

In this kind of case, we'd have no change to anything in Epsom unless we have the agreement of everybody in Epsom and every other potential veto player. But I caution that there would be zero case for any other change in this kind of world either: there will always be parties so intractable that you cannot compensate them for allowing the existence of partnership schools, mining on land they don't own but care about, or subdivision on land they wrongly believe to be critical for agriculture. There are no Pareto improving moves where we allow psychic costs to count; heck, some would object just for lulz. We need Buchanan and Stubblebine's framework instead, where we count actual willingness to pay rather than imagined harm.

But while that seems that it would allow for no change to anything anywhere, he de-privileges the status quo where the status quo policy emerged not from unanimous consent but rather from the operation of a majority coalition: the majority giveth the regulatory rent, the majority taketh away.

Return again to the rent-control example. If the initial legislation establishing rent control is considered to have been an unwarranted ‘‘taking’’ of potential value from acknowledged owners of property, the maximal compensation that might be offered to beneficiaries may be much below that required to secure agreement.

For any of several reasons, there seems to be a strong likelihood that the parties on the separate sides of any potential agreement will differ, and perhaps substantially, in their relative evaluations of the control claim. The current recipient of the housing subsidy may treat the claim as if protected by an operative property rule, whereas the prospective beneficiaries of abolition may reckon optimistically on electoral success, in part because they do not accept the claims to be legitimate. Both sides of the prospective debate about legislative action to remove existing controls may find it advantageous to invest resources in rent seeking – the occupant, to protect the value of her claim, and the prospective beneficiary of removal, to secure the promised return. The political economy of conflict replaces the political economy of consensus.

And what of the case in which abolition of height and density restrictions in Epsom would increase the value of land in Epsom, but reduce the cost of dwellings (each on a smaller footprint), and so enrich the current owners and benefit new residents? While it's frustrating, I still think we have to pay them off at the margin: they perceive themselves as aggrieved, and they're powerful enough to block things.

David is doing exactly what he needs to be doing as Epsom MP: enhancing the bargaining position of his voters in the later negotiations, so that when their illegitimate restrictions on others' land use are removed, a bunch of very wealthy people will be compensated with even more money for a policy move that will very likely make them wealthier even absent the compensation. But it's voters like these, in Epsom, that make me despair for the existence of a liberal party based there. Hard to say where would be better though; if it were based in the Coromandel, maybe it would care most of all about Coromandel people's right to block mining on other people's land even if there are zero real effects on them, because of the character of the Coromandel, and because they have a starting right that allows them to block.

The lefties have one part very right when they suggest that RMA reform should start in Epsom: why should the status quo be especially privileged in privileged places? I can't see how anybody can credibly stand on a platform of "Development for thee, but not for me". The better starting point is individual property rights, default presumptions of a right to build or to develop, and restrictions placed where there is evidence of real and substantial negative externalities. It's liberal, and it's right, and it's what moves the country forward: not just on housing, but on development more broadly.

Buchanan's Soul

Andrew Farrant points me to this lovely tribute to James Buchanan from Geoff Brennan and Mike Munger.

Brennan and Munger note the seeming incongruity of one of Buchanan's titles, "The Soul of Classical Liberalism". I hadn't realised the strength of Professor Buchanan's anti-theism; it never really came up when I was at GMU. Geoff Brennan provides the following anecdote:

“It was Ash Wednesday – probably 1978 or 79. I had, in the manner of ‘Episcopalians in good standing’, taken myself to church that morning before work and had been duly signed on the forehead with ashes as a symbol of my mortality: “Dust thou art, and unto dust shalt thou return!” Although one is technically not supposed to do this, under normal circumstances I would have washed off the ashes before proceeding to work. But on this occasion I went directly to the office from church. Though I intended to visit the bathroom to clean up immediately on my arrival, by the time I got to work I had become pre-occupied with other things and simply forgot. So it was that, when Jim sauntered into my office at around 11, he immediately pointed at me, and the following conversation ensued:

Buchanan: “What’s that on your face?”
Brennan (somewhat absentmindedly): “Oh, that must be my ashes. It’s Ash Wednesday and we get marked with the cross from the ashes of last year’s palms from Palm Sunday”.
Buchanan (instantly furious): “That’s god d**ned gross! That’s the grossest thing I’ve ever seen. You going around displaying your religion like that! I might as well go round indulging in indecent exposure!”⁴

The situation deteriorated from there. ...

⁴ This is a somewhat expurgated version of the remark. The original entailed too much anatomical detail to be admissible among this respectable readership!

VPI was a ridiculously productive place, and a seemingly pretty explosive one. I here linked to a few Tullock tales.

The whole piece is well worth reading.

Condolences to Betty

I've read a half-dozen obituaries this morning on James Buchanan. But I've yet to see one that offers condolences to Betty Tillman.

This is wrong.

James Buchanan was one of the great men of the profession. Betty was his secretary since 1961, following him as he moved universities, and always seemed more a partner to him. She will be grieving terribly. And her assistance to James over the last fifty years should not pass without note. Buchanan called her "my long time girl Friday". Here they are at the Nobel award ceremony.

Betty is to James's left; his wife, Ann, is to his right.

Here's the GMU note about Betty from 2005. Here is a post on Betty's 80th birthday party and retirement.

I hope lots of folks on that side of the world are giving her hugs.

I also hope that, someday, there will be a movie of the life of James Buchanan, and that Betty's role will feature prominently.

Some obituaries:

New York Times
Cato - David Boaz
Independent Institute - Randy Holcombe
Washington Post
Think Markets - Mario Rizzo
Tim Groseclose
PERC - Randy Simmons

The newspaper obituaries should end: "Professor Buchanan is survived by his "Girl Friday" of half a century, Betty Tillman."

Stealth Taxes

Frances Woolley argues the case for hidden taxes:

Visible taxes can lead to bad policy choices when a tax's visible incidence is different from its actual incidence. The average tax payer will vote for a tax/benefit scheme that appears to be in his or her interests - for example, increased health care spending financed by increased corporate income taxes - not realizing that the burden of the corporate income taxes might be shifted forward onto customers or backwards onto employees - in other words, right back onto the average tax payer.

It's a nice second-best argument. And, consistent with one of my favourite papers in experimental economics (previously discussed here): Sausgruber and Tyran's finding that buyers in a double-auction will happily vote for inefficient redistribution programmes framed as a tax on sellers but will oppose it when framed as a tax on buyers, despite equivalent incidence.

I'm not sure that a tax's invisibility necessarily protects against stupidity. New Zealand's clean GST is built into consumer prices; there's still not unreasonable pressure to wreck it by exempting food. But, that Labour's only advocated the wrecking ball when safely away from the Treasury benches suggests something.

Frances continues:

A final argument for stealth taxation is that it facilitates budget balance.  People want good things from their governments, like health care and old age pensions. But they don't want to pay taxes. So the temptation is to vote for spending initiatives and vote against any tax increases. When taxes become more visible, people become more aware of the taxes that they are paying, and lobby harder for tax cuts. The result: future generations are burdened with debt and taxes.

Now the argument could be made that in fact invisible taxes contribute to government debt - if the average voter realized how little he benefited from the Bush (Bush-Obama?) tax cuts, how much those tax cuts benefitted the richest Americans, and just how mind-bogglingly rich the richest Americans are, perhaps he would have voted against them. I don't know of any decisive evidence on this point, so if you disagree, feel free to say so in the comments.

Some degree of visibility in taxation is desirable - without information how the tax system works, and who bears the burden of taxation, it is difficult to make good policy decisions.

This is a fun one to think through. Specify that voters are largely ignorant but will vote against anybody they think is to blame for bad outcomes. And, specify a Westminsterian system so they know who's to blame for bad outcomes. In that world, I'm not sure whether it matters a lot whether the taxes are hidden or visible. If taxes with too high of deadweight losses are used to fund services of too little value, incumbents get turfed. Maybe it takes slightly longer if policy has lagged effects. Retrospective economic voting then saves things. If there's no opacity, the ruling party has to balance losses from bad effects of policy against loss in popularity from running "works, but unpopular" policy. At least there's weight on the effects of policy despite voters not knowing a damned thing except what they see out the window.

In a political system where responsibility attribution is more difficult - either Parliamentary with PR and powerful committees or a Presidential system with strong division of power and a federalist structure - things are harder to work out and could then persist longer. Then there's rather less incentive to weigh the effects of policy; rather, you blame the President if you're Congress, blame the other party in Congress if you're the President, blame the State if you're local government. Blame gets spread and incentives for good policy are flattened.

I'm also not sure that complete opacity is as good an idea in a Brennan-Buchanan Leviathan taxation world than in a Musgrove benevolent despot one.

Rents and the social nexus

I postponed grad econometrics by a year to take James Buchanan's Constitutional Political Economy course. Buchanan there argued* that taxation is legitimate because any income above that which would accrue in the state of nature can be seen as a rent stemming from participation in the social nexus that would have been impossible absent the state. So taxation and redistribution wasn't theft.

Leaving aside problems of how to accrue the gains where the sum of marginal products is greater than one, I asked Professor Buchanan instead whether we could similarly argue for forced live kidney donations by folks over the age of 35 or so. Life expectancy beyond that which would have accrued in the state of nature could similarly be viewed as a rent. Buchanan favoured somewhat egalitarian income redistributions but not somewhat egalitarian kidney redistributions; I don't recall any particular reason why the one was acceptable but the other wasn't.

I'm reminded of this because Blunt Object points to Megan McArdle's similar drawing of parallels:

John Quiggin complains that what the classic essay I, Pencil actually shows is the wonders of a mixed economy, not the market. The essay traces all the amazing transactions that need to occur for a simple pencil to be made, pointing out that not one of the people involved could make a pencil by themselves, and most of them don't even know that they're involved in producing a pencil. But what about the US Forestry Service? Rail rights of way? The education system?

This is an argument to which the left-wing has a great deal of recourse whenever anyone suggests that people have a right to keep what they earn from voluntary transactions. You can only make money in the context of society, and so society has a right to regulate your transactions, and seize the proceeds, in any way that society sees fit.

And yet, the argument applies just as well to our sex lives or our political beliefs: they take place in the context of all sorts of government protections, from rape prosecutions to whistleblower laws. Without markets and the government, the "anything between two consenting adults" morality to which the majority of the elite subscribes would be impossible; the closest substitute for these things is family, and families have a very clear, deep, and persistent interest in regulating the sexual behavior of their members.

I'd expect that Kings could also thereby have justified Droit du Seigneur.

The argument goes farther than Megan thinks. If we only had a life expectancy of about 35 years back in the state of nature, then every year of life beyond that is a rent subject to appropriation or redistribution. So is every year of life for someone who would have died in infancy in the state of nature.

Quod nimis probat, nihil probat.

* Alas, all my notes are in my still-red-stickered office, so I can't double check.

Buchanan on Meddlesome Preferences

From "Politics and Meddlesome Preferences", in volume 13 of the Collected Works of James Buchanan:

Consider the following politically orchestrated regulations:

1. Prohibition on private leaf burning.
2. Prohibition of the possession of handguns.
3. Prohibition of the sale or use of alcoholic beverages.
4. Prohibition of smoking in public places or places of business.
5. Prohibition on driving or riding in an automobile without fastening seat belts.
6. Prohibition on driving or riding on a motorcycle without wearing crash helmets.

...It seems quite possible that at least in some political jurisdictions a majority of voters might be found to support each and every one of the six activities listed. As noted earlier, however, the critical weakness in ordinary majoritarian procedures is that the intensities of preference are not taken into account. [So long as each supporter of each regulation values the regulation weakly but feels strongly the pains on the one dimension he opposes, then] The political process may well work so as to make each and every person in the relevant community worse off with enactment and enforcement of all of the prohibitions listed than he or she would be if none of the prohibitions were enacted.

My worry is there's a well-funded and vocal minority preferring prohibition across all margins in addition to folks' weak preferences.

...These prohibitions and regulations, existing or proposed, may be based on "scientific grounds." These critics might allege that leaf burning releases dangerous elements in the atmosphere; that handguns kill people; that alcohol is addictive and a causal factor in disease; that smoking is dangerous to health; and that seat belts and crash helmets save lives.

These arguments are highly deceiving in that they attempt to introduce, under the varying guises of "science," an objective value standard, one that "should" be imposed on all persons. Strictly interpreted, of course, almost any activity each of us undertakes is, in some way or another, a possible risk to our health. Once this is recognized, the question is one of drawing lines, and there is no well-defined set of activities that fall into one category or other.

Towards a Sumptuary Constutitution

We have been caught up in a wave of politicization for several decades. As a result, the set of activities that have been subjected to governmental-bureaucratic prohibition, regulation, and control has been expanded dramatically. Once politics was discovered as the apparent low-cost means of imposing preferences on behavior, a Pandora's box was opened that shows no signs of closing itself.

In these as in other aspects of the relationship between the citizens and the government, the dangers of excessive politicization cannot be avoided merely by a change in the makeup of political parties or by a change of politicians. In democracy, politicians respond to the electorates, and electoral majorities may, in a piecemeal fashion, close off one liberty after another. Prediction of such a prospect suggests that genuine reform can come only by constitutional rules that will prevent ordinary democratic majorities, in the electorates or in legislative assemblies, from entering too readily into the sumptuary areas of activities. Until and unless we recognize that politics, too, must operate within constitutional limits, each of our liberties, whether valued highly or slightly, is up for grabs.

Smart guy, Buchanan. Nobel in Economics 1986. Follow-up questions for my Econ 336 and 653 students:

• Why would logrolling not ensure the satisfaction of mean rather than median voter preferences across all issues?
• To what extent does the existence of fiscal externalities through the public health system affect the problem?
• While majoritarian democracy may have this problem, under what conditions might we expect a free-market anarchy of the type discussed by Caplan and Stringham to exhibit similar problems with meddlesome preferences?