Tuesday, November 11, 2008

On libertarianism and public goods

I have noticed an article in Tristan Mills' shared links defending libertarianism from the objection that the free market would undersupply public goods.

If that's all Greek to you, some explanation. 

Shared links - a bloggers tool for sharing articles read elsewhere that might be interesting. My most recent shared links are listed on the right under the imperative read this too. A bit like libdig for one.

Libertarianism - an ideology that holds that a) property is more important than liberty, and b) that everything the state does is evil. At least those seem to be the priorities. If you are interested in libertarianism, I strongly recommend reading this, detailing one liberterian's escape after seeing the flaws in the ideology. In fact it is a more worthwhile read than the rest of this blog post. You can skip the stuff about the minimum wage. You may ask why I show so much interest in such a fringe ideology: it is partly based on that article that I believe libertarians are usually redeemable. (And while the arguments are specifically about the Ayn Rand flavour of libertarianism, most are applicable to saner flavours.)

Public goods  - (wikipedia) goods that we benefit from, like air, science and free software, that we don't use up by enjoying, nor can we be effectively prevented from using.

OK, so what does this article say? There's a certain amount of reference to prior arguments, so pay attention.  I should add that the author, ka1igu1a, appears to be one of the better kinds of libertarian, so I may be making some unfair assumptions.

[quoting] Underproduction of public goods is inevitable in the presence of 1) the ability to free-ride (i.e. non-excludable goods) and 2) rational self-interest.[end quote]

Knapp attacked this position by claiming "underproduction" to be subjective measure, a measure typically proclaimed by fiat by the central planner. Holtz's rejoinder to Knapp was that Knapp didn't understand "higher mathematics" and that economists have in their toolbox mathematical measures of optimality, including such measures of Pareto or Kaldor-Hicks Efficiency.

However, ... In Public Choice theory, the "Redistribution Problem" is recast as "Government Failure." Government Failure more or less holds that public goods will be systematically over-produced. It should be noted that "over-production" violates any algorithmic standard of optimality just as under-production does; and,in fact, the violations can be much worse.

I have used the ellipsis to cut out what is presumably a carefully constructed argument, which I will take for granted. Ka1igu1a's retort boils down to this. Free markets may underproduce public goods (although I'm not necessarily accepting this), but governments overproduce them. This is of course no contradiction. I think it is probably true that markets underproduce public goods and governments overproduce them. This is hardly a compelling argument for the abolition of governments, but it is one for not letting them get too big.

The classic example of a public good supposedly is "national defense." Of course, it's difficult to justify why the US needs to spend roughly a trillion dollars a year on national defense. National Defense is Exhibit A of "government failure." The government failure is not in providing the public good of "defense," but that the overproduction of this public good is orders of magnitude more inefficient than any "market failure" could ever possibly be.

A good example. I agree that the US defence budget is too large. On the other hand I'm not sure that all defence budgets around the world are always too large. There are times, aren't there, when rearmament is a necessary evil? The 30s come to mind.

If you seriously believe that the US military industrial complex, with all it's stockpiles of WMD, is somehow a legitimate consequence of meeting a "public good,"

A US focus is fair enough on a US blog - but how does this argument apply elsewhere in the world? 

Holtz seems unaware that human instrumental rationality, point (2), has been debunked by experimental economics, sociology, and game Theory for some time now.

No no no. If the problem is that it is irrational to produce public goods, it misses the point to assert that people aren't particularly rational anyway. Any rationality will lead to underproduction of public goods and any irrationality will lead to, well it could lead to anything, but there is no way you can predict it would lead to a systematic balancing overproduction of public goods. This is a very sloppy argument.

I should point out that Freedom Democrats utilizes Drupal Open Source Software. According to Holtz, I really shouldn't be even posting on this site, because Open Source Software should have long ago been killed by the non-excludable, free-rider problem. Yes, Open Source Software satisfies the definition of a "public good," however no one seriously would even dare to make a Pareto-optimality argument against it's under-production.  Holtz's "inevitably argument" is empirically debunked.

If only Holtz had said that no public goods would be freely produced, ka1igu1a would have a point, but he didn't and he doesn't. My guess is that production of more, better open source software would be closer to Pareto optimal. Not that I think the state can do much to help.

OK, so where does this leave us. Public goods will be underproduced by free markets. There is a real dearth, I suspect, of very useful information. Trivial information you can put in a magazine or something and sell, but anything really important people will hear about, and you can't copyright the truth. In some respects governments do OK here - they pay for scientific research for example. But I guess if they did the same with software, it would be a disaster.

But drawing to a conlcusion, there seems to be a desperation among libertarians to come to the right conclusions however sloppy the arguments used to get there. To me this suggests that we are not dealing with the real reasons somebody has for supporting libertarianism. It suggests an approach which claims to know the answer before the question has been asked. This is not principled or rational, but arbitrary and dogmatic.

Monday, November 10, 2008

Tax: Labour to copy the Lib Dems; Tories to lose the plot

We hear that Gordon Brown (not Alasdair Darling - what is his job, again?) is thinking about tax cuts as part of a fiscal stimulus package. This is something that the Lib Dems have been advocating for some time, particularly that taxes on people on lower and middle incomes are particularly good candidates for lowering to stimulate the economy. Such people are most likely to spend the extra money, and, if they are homeowners, to keep their homes as a result. This sort of stimulus also has the advantage over extra public spending in that it benefits the private sector directly, not just indirectly. More from Nick Clegg and myself on this here.

Some will doubtless feel offended at Labour stealing our policies, but I rather like it. They are admitting to the world that we were right all along, again, and that if you want the right policies on the economy without months or years of dithering first, then vote Lib Dem.

The Tories on the other hand, well, what can I say. 

The Tories unveil their own plans, aimed at dealing specifically with unemployment, on Tuesday.

They say they would fund tax cuts through existing spending and not - as they suspect the government would do - through borrowing. 

The Today programme was suggesting this means tax cuts targetted at people "likely to lose their jobs." Huh? What? How can you measure who is likely to lose their jobs, in a systematic enough way to include this concept in tax law? Or perhaps they just mean tax cuts for bankers. That could be it. But incorporating this kind of nebulous concept in tax law is even worse, and will lead to far more pointless complication of the tax system, than even Gordon Brown's insufferable tinkering. Whatever happened to a simpler tax system?

Bizarre as this is however, it is not the worst of it. They would fund these cuts "through existing spending" [cuts], not through borrowing. So this is not going to be a fiscal stimulus at all. The Tory response to the economic climate is to do nothing. Whoopee.

Tuesday, November 04, 2008

The Nick Clegg interview

I've been well scooped on this by Charlotte, but I don't mind at all. Sharp and lithe, she said I was and I still can't decide which is the more gratifying. Charlotte was smoking like a chimney - with carbon capture and storage - throughout on her e-cig, and none of us noticed. Ditto in the cafe afterwards, until she 'fessed up. It looks like technology has thoroughly solved the problem of nuisance smoke. But I digress.

So, given the chance to grill Nick Clegg, what I wanted to do was deal with some of the recent criticism, not all from enemies, that our policy of tax cuts for people on low and middle incomes doesn't stand up to scrutiny so well after the latest phase of the financial crisis - or at least that it is no longer so clear exactly what we are proposing. I was hoping to steer the conversation towards how we might restore the discomfort our policy had been causing the Tories, but it didn't turn out like that.

So here it is, and I'm working more or less from Charlotte's transcript, so thanks for that. Nick is in italics.

If you go back to before the latest tranche of the financial crisis, our policy of tax cuts for the poor was causing all sorts of discomfort for the conservatives and their policy of the cupboard was bare was looking a bit foolish. I don't think that's working quite so well now. A lot of people are saying you can't offer tax cuts to people at the moment, and the osbourne attitude to business appears to be picking up a bit. is that fair? is it harder for us now to capitalise on teh position we had?

I think it's exactly the reverse. The one thing people instinctively know you can't do as you head into a recession is jack taxes up. If you look at the number of now serious commentators in the press, who are now saying that if you want to stimulate growth, which is something you desperately need to do if you're heading into a very serious recession, one of the ways, not the only way, but one of the ways is by cutting taxes. in a way - and this is the crucial caveat - in a way which can stimulate spending. Every economist will tell you that if you provide top down tax cuts to people at the top as the tories have done with their only tax proposal on inheritance tax, it doesn't help the real economy because they just salt away the difference. bottom up tax cuts do, they're socially just, they're clear and so helps stimulate spending on the hight street because people on low incomes can have the money to spend it, so the economic logic has got greater. Meanwhile people like [?] saying that tax cuts are now necessary, that puts us on the right side of the argument. 

Look at the Tory position:I think the Tories have backed themselves into a disastrous cul-de-sac. There's no evidence that the Osbourne thing is filtering though. They've plummeted in the polls in terms of economic competence - hardly evidence of a message getting through to the public. What they're doing, which I think is a fascinating but from their point of view a disasterous strategic decision,is they have basically said to themselves, clearly, that their only purpose is to blame it all on Gordon, and that to do that they need to constantly go and on about how's he's spent too much in the past, therefore that allows us no flexibility to do anything now. I think it is a disasterous solution - firstly it's economically illiterate, because they're going on about government debt when the real issue in the British eoncomy is astronically high levels of private debt. I'm not pretending it's easy to make that distinction in public debate, but if you want to get down to the economic fundamentals - and you can argue it's a couple of percentage points to high or too low, but comparitarively speaking it's approximately 40%, it'll probably shoot up to 60% because of the automatic stabilisers and because of the bank bailout thing. Italian debt, if you want an extreme example is above 100%, French and German debt is about 20% higher and it's much, much lower than American debt. It's only, as any columnist will tell you - Government debt is - a compariative science. How are you compared in your Government debt to other government debts is often the crucial thing, because that's what leads to runs on currencies. So I think they're wrong economically, they're picking the wrong target, they're fighting over the wrong bone - government debt. The real problem is private debt. People have got themselves into terrible, terrible trouble. One of the ways you help people get out of debt is putting money back in their pockets.

Why this has been such a strategic disaster, is because their strategy is one of blame and inaction. They have no proactive menu to give the british people. they've got nothing to say on tax cuts, they've got nothing to say on interest rates. They say piffling stuff on small business, council tax - it's all smoke and mirrors and not serious. so i think they've got themselves into serious trouble. They can't do that for the next two years. "It's all your fault and there's nothing we can do" That council of despair is not going to work with the voters.

This is breathtakingly good stuff, and I am somewhat thrown off course by it all. Go back and read it again.

On a specific aspect of this, they're saying you shouldn't loosen fiscal policy at this sort of time...

They're not even saying that! Osbourne's remark was that he accepted borrowing going up.

The Keynesian line is that you do loosen fiscal policy because it keeps things going. I can see why they're trying to [oppose] that [loosening], because they're trying to reclaim a reputation for being sensible on the economy, which they'd lost to Labour.

I'm not sure about the transcript here, but what I am getting at is this. Osborne seems to be saying (I caught the first 5 minutes of one of his recent speeches), that you shouldn't loosen fiscal policy beyond the automatic stabilisers, because this does more harm than good to eventual recovery. So I am looking for our response to this specific point.

My feeling is that Osborne's point is over-simplified. There is a danger that if you expand the state to make up a shortfall in economic activity during a recession, then there will be no slack for the private sector to expand into, and so the recession will grind on. But to say that there should be no intentional expansion of state activity makes sense only if you do - as Osborne seems to - regard all state activity only as a deadweight drain on the productive economy; whereas if the state also has, through infrastructure, education and security for example, a positive effect on the private sector economy, then some expansion here, during a recession, seems much more reasonable. 

Of course, as Nick has said, tax cuts for the poor are also an effective fiscal stimulus, and one that boosts the private not the public sector.

Anyway, onwards...

Of course you need to be fiscally responsible. But you do that over the cycle. As we're heading into what might be the worst recession in a generation, it is recipe for masochism and greater recession if you spend all the time fighting over actually miniscule differences in government debt. You've got to get growth going. If you don't, there's no revenue there, [...]. That is a priority now. I think what's interesting about the Tories is that they don't understand the enormity of what we're up against. They certianly don't understand the enormity of the knock to the legitimacy of their own prejudices in favour of deregulated financial services and so on, and the don't undrstand the risks of their 'do nothing' strategy - which is what they are, in effect, advocating.

I change tack at this point

Well, Labour on the other hand have already spent all of our £20 billion, therefore we had a policy that was agreed before the latest crisis. To carry on, seemingly unchanged, seems like we're not accepting what's happened, that in two years we're going to have to start again.

First of all, you don't rewrite every pound and pence of your public spending plans in the middle of a vertical decline in the national econonmy. Clearly That's something you resolve, finally, when you go the country before the general election. Whether you like it or not it's a moving target - it's part of the art of politics. what you can do, and what we're rightly doing, is saying at precisely the time when how you spend pulbic money is more important than ever before, because in addition to value for money, and accountability to the taxpayer, you've also got to work out how the money you spend on behalf of the public is helping to stimulate the economy or not.i think we are quite right in saying that in those circumstances, the arguments we've always levelled against certain forms of public spending, 5 billon on id cards, 13 on nhs it system which doesn't work, 2 billion on a whitehall inspection regieme, 12 billion on a new it survilance scheme, that is not intelligence use of money. we object to those allocations of money on reasons of principle and policy, but they are especially daft at at time when you are hoping public is going to stimulate the economy, and so should be spent in different ways. 

I think this is a very important point. Some people who didn't particularly like Make it Happen (pdf),  were saying that it should be thrown out as soon as economic circumstances seemed to change. But the same arguments would apply to any spending policy they did like.

And I think this is a good answer to some of the complaints that we are not clear enough. Any package will have to be adjusted to point in the economic cycle we find ourselves in at election time - not the point we find ourselves in today - but that by making our views on fiscal policy clear, we can indicate today what kinds of adjustments those will be in a recession - largely that the spending/tax cut side will be maintained, but that revenue side will not be expected to fully deliver yet.

Nick senses what I have been groping for 

There's a slightly wider argument lurking behind your question - is public spending the right way to stimulate the economy? It is one way to stimulate demand, but it's not the only way, and crucially it's a delayed way of doing it. It has a chronology to it. The idea that brown should be become a latter day Anglo-Saxon version of Francois Mitterand , creating huge public projects around the country and this'll put us on the economic straight and narrow is a nonsense. Clearly public spending plays a role, borrowing goes up as the automatic stabilisers kick in, tax revenues go down, benefit payments go up.. i think what we need to do is maintain, as I tried to encapsulate in this week's prime minister's questions, that at precisely the times when millions of British families are tightening their belts, how government spends our money should be subject to even more scrunity than before. They need to be spending it on the right kinds of things. That seems to me more valid now than before. 

Oh, so I was just asking the usual Keynsian v Austrian kinda question. Bit of a wasted opportunity perhaps. In the back of my mind there was a particular political angle to this, some way to pin down what the Tories actually stand for on something. Is Osborne a hardline Austrian, and would this be politically damaging? But Nick, in full flow, is a force of nature, and we didn't get there. Perhaps just as well as I was sitting next to a renowned libertarian who is probably sympathetic to the Austrian school.

Jonathan, Charlotte, Alex, Mat and Millennium Dome himself went on to ask their questions. I needed a rest.