My immediate reaction to the shooting of Congressman Gabrielle Giffords was "Crap, I hope she wasn't a liberal." There are two reasons for that: if she was, then 1) I wouldn't be able to watch or read the news for several weeks without being inundated by stupid commentary about the "irresponsible vitriol" directed at liberals from the political right; and 2) this random, despicable crime, committed by an obvious lunatic, could significantly impede the new Republican House majority's agenda to curb the growth of government control over the economy. It turns out Giffords was/is not particularly liberal, but because she was a Democrat, it looks like many on the left will try to coopt this tragedy for political gain anyway.
It almost goes without saying (at least for the half-dozen people who read this blog from time to time), but I'll say it anyway, that it is idiotic to blame our political discourse for such a tragedy. Besides the fact that political speech is probably more polite and "PC" than at any time in US history, especially when it comes to very emotional and significant political issues, it's unclear that the use of violent imagery and harsh criticism is even positively correlated with political violence, let alone materially so. And any causal relationship is even less clear. Finally, even if colorful political rhetoric could be proven to increase political violence, I think that's just something we have to accept as a society. In a country of 310MM people, the level of political violence is so low that the threat of violence simply doesn't have the intended effect (assuming of course the perpetrator of the threat is not thinking one level deeper and attempting to sabotage the opponents of his target).
I'll end this post by pointing out what a jackass Pima County Sheriff Clarence Dupnik is. Without any evidence (the shooter is not talking), he implied strongly that recent political fights in Arizona, which he equates to prejudice and bigotry, would have a motivating effect on unbalanced people like the shooter to commit violence.
His implication of course is logically inconsistent with the facts concerning the shooting. If the political environment in Arizona is so toxic that unbalanced people could be incited to commit violence, why was there zero security at a campaign event for a sitting congressman? Literally zero -- there wasn't even a security guard on duty at the shopping mall. If the sheriff really believed that political violence was caused by vitriolic rhetoric, and that Arizona was the "capital" and the "Mecca" of such rhetoric, then he was completely negligent in carrying out his duties.
The fact that congressmen generally do not receive security at public events, even liberal congressman who are the targets of Tea Party ire, undermines the credibility of after-the-fact accusations like those of the sheriff's. To be clear, I think it's amazing that important public officials like congressmen do not routinely have security. That's pretty good evidence that the real professionals in the law enforcement establishment do not take political rhetoric seriously.
Sunday, January 9, 2011
Sunday, August 15, 2010
Fiat money, part 3
(Follow-up to part 1 and part 2.)
Let’s clear up some potentially confusing points about fiat money on our island:
We said that when the government spends, it increases net dollar wealth, and that when it taxes, it decreases net dollar wealth.
So you can think of the total government debt as the “national savings account”. But it is important to note that when we say "savings", we are really referring to savings in the form of dollars (or Treasuries, which we’ll get to later).
If I chop up some wood and build a bird house for my pet woodpecker, I've created wealth and my net worth (assuming that other people are interested in buying the bird house) has gone up. But my dollar wealth is unchanged. Since the total number of dollars out there is the same but there are more goods it can buy (because that spectacular bird house has been built), overall prices might have to come down. So you could argue that the government has to issue more dollars to keep pace with the amount of “real wealth” that is created.
Where does the extra money "come from"? Is the government racking up a bunch of debt?
You might be confused at this point as to where the money used for deficit spending comes from. There are two possible answers: the government can "print" the money, or it can "borrow" the money.
Let’s start with borrowing, since that’s the case most familiar to a lot of us.
In order to borrow money, the government has to print up a bunch of IOUs and sell them. We'll call the island IOU's "Treasuries" to match the U.S. terminology. So the government prints some Treasuries and exchanges them for cash with "regular" civilians. For now, those civilians represent island citizens, but later we'll consider what happens if they are foreigners.
For instance, if the government collected $500,000 in taxes but wants to spend $520,000, it could issue $20,000 worth of Treasuries and sell them to island residents. In the process, the government has $20,000 worth of cash, and it can proceed to spend or give away the money. If Lenny the Lender purchased $100 worth of government Treasuries, then he's just as wealthy now as he was before. His cash has been reduced by $100 but he now has $100 worth of Treasuries.
So now when we refer to "dollar savings" we'll be referring to cash or Treasuries. Both are a form of dollars; the difference is the Treasuries are scheduled to "turn into" regular cash at a future date. Alternatively, you could say that cash is just a "zero maturity" Treasury, i.e. a Treasury that gets paid back by the government right now.
So how does “printing” money work?
Well, on the island, we can literally print it and spend it. It is our imaginary island after all.
But does the U.S. actually just print money and spend it?
This is a minor point, but the U.S. Treasury works slightly differently. (Thanks to ESM for spelling this out for me.) If the U.S. Treasury wants to "print money", the Treasury issues bonds to the Federal Reserve, and the Fed pays cash to the Treasury. Now the Treasury has cash to spend, and the Fed is holding onto a bunch of bonds. The Fed can either hold the bonds, sell them on the open market, or tear them up. In the last case (which is quite common), we can say that the Treasury effectively printed money, and for some reason, the amount that it printed is not added to the U.S. debt. This is horribly inconsistent, but it’s the way it is. It's as the government periodically get loans and the bank keeps forgetting to collect debt payments.
Let’s clear up some potentially confusing points about fiat money on our island:
We said that when the government spends, it increases net dollar wealth, and that when it taxes, it decreases net dollar wealth.
So you can think of the total government debt as the “national savings account”. But it is important to note that when we say "savings", we are really referring to savings in the form of dollars (or Treasuries, which we’ll get to later).
If I chop up some wood and build a bird house for my pet woodpecker, I've created wealth and my net worth (assuming that other people are interested in buying the bird house) has gone up. But my dollar wealth is unchanged. Since the total number of dollars out there is the same but there are more goods it can buy (because that spectacular bird house has been built), overall prices might have to come down. So you could argue that the government has to issue more dollars to keep pace with the amount of “real wealth” that is created.
Where does the extra money "come from"? Is the government racking up a bunch of debt?
You might be confused at this point as to where the money used for deficit spending comes from. There are two possible answers: the government can "print" the money, or it can "borrow" the money.
Let’s start with borrowing, since that’s the case most familiar to a lot of us.
In order to borrow money, the government has to print up a bunch of IOUs and sell them. We'll call the island IOU's "Treasuries" to match the U.S. terminology. So the government prints some Treasuries and exchanges them for cash with "regular" civilians. For now, those civilians represent island citizens, but later we'll consider what happens if they are foreigners.
For instance, if the government collected $500,000 in taxes but wants to spend $520,000, it could issue $20,000 worth of Treasuries and sell them to island residents. In the process, the government has $20,000 worth of cash, and it can proceed to spend or give away the money. If Lenny the Lender purchased $100 worth of government Treasuries, then he's just as wealthy now as he was before. His cash has been reduced by $100 but he now has $100 worth of Treasuries.
So now when we refer to "dollar savings" we'll be referring to cash or Treasuries. Both are a form of dollars; the difference is the Treasuries are scheduled to "turn into" regular cash at a future date. Alternatively, you could say that cash is just a "zero maturity" Treasury, i.e. a Treasury that gets paid back by the government right now.
So how does “printing” money work?
Well, on the island, we can literally print it and spend it. It is our imaginary island after all.
But does the U.S. actually just print money and spend it?
This is a minor point, but the U.S. Treasury works slightly differently. (Thanks to ESM for spelling this out for me.) If the U.S. Treasury wants to "print money", the Treasury issues bonds to the Federal Reserve, and the Fed pays cash to the Treasury. Now the Treasury has cash to spend, and the Fed is holding onto a bunch of bonds. The Fed can either hold the bonds, sell them on the open market, or tear them up. In the last case (which is quite common), we can say that the Treasury effectively printed money, and for some reason, the amount that it printed is not added to the U.S. debt. This is horribly inconsistent, but it’s the way it is. It's as the government periodically get loans and the bank keeps forgetting to collect debt payments.
Sunday, July 18, 2010
Intro to Fiat Money Part 2
To review the ideas from part 1:
1. All the island dollars that people have came from government spending at one time or another.
2. When the government spends, it increases the net dollar wealth of the world. You can think of government spending as the government printing green pieces of paper and exchanging them for good and services.
3. When the government taxes, it decreases net dollar wealth. You might think of taxation as the government collecting money and dumping it into a shredder.
4. Fiat money has value because it’s the only form of payment accepted for island taxes.
A lot of this probably sounds odd if you're used to thinking about gold backed currency. The goal here isn't to attack or defend fiat currency; rather I just want to explain how it works and how these ideas might affect policy decisions.
As Bob and ESM pointed out in the comments to part 1, in year 1 the government has to spend (or give away) at least as much money as it wants to collect in taxes each year; otherwise people won't have money with which to pay their taxes. ESM went further and said that the government has to spend enough for people to pay their taxes and satisfy their demand for dollar savings.
If the government spends or gives away $6000 per person per year and collects $5000, then people will be able to save $1000/person on average. Some people might save more or less (and some could end up in debt), but $1000 has to be the average.
You should also note that in this example, the government ran a deficit of $1000/person. So each year, the government deficit matches the change in private dollar savings. If the government runs a deficit, then total dollar savings must rise, and if the government runs a surplus, total dollar savings must fall. (This might be the opposite of what you thought previously.)
For this reason, some people (though admittedly, not many) refer to the national debt as "the national savings account". People's total accumulated dollar savings must match the government's accumulated dollar debt. It's a closed system after all.
A few other interesting points about this system:
Next time: How does government borrowing work? Is printing money the same as borrowing?
1. All the island dollars that people have came from government spending at one time or another.
2. When the government spends, it increases the net dollar wealth of the world. You can think of government spending as the government printing green pieces of paper and exchanging them for good and services.
3. When the government taxes, it decreases net dollar wealth. You might think of taxation as the government collecting money and dumping it into a shredder.
4. Fiat money has value because it’s the only form of payment accepted for island taxes.
A lot of this probably sounds odd if you're used to thinking about gold backed currency. The goal here isn't to attack or defend fiat currency; rather I just want to explain how it works and how these ideas might affect policy decisions.
As Bob and ESM pointed out in the comments to part 1, in year 1 the government has to spend (or give away) at least as much money as it wants to collect in taxes each year; otherwise people won't have money with which to pay their taxes. ESM went further and said that the government has to spend enough for people to pay their taxes and satisfy their demand for dollar savings.
If the government spends or gives away $6000 per person per year and collects $5000, then people will be able to save $1000/person on average. Some people might save more or less (and some could end up in debt), but $1000 has to be the average.
You should also note that in this example, the government ran a deficit of $1000/person. So each year, the government deficit matches the change in private dollar savings. If the government runs a deficit, then total dollar savings must rise, and if the government runs a surplus, total dollar savings must fall. (This might be the opposite of what you thought previously.)
For this reason, some people (though admittedly, not many) refer to the national debt as "the national savings account". People's total accumulated dollar savings must match the government's accumulated dollar debt. It's a closed system after all.
A few other interesting points about this system:
- The purpose of taxation is not to raise revenue, at least not on the federal level. The island government prints and destroys its own currency, so it can spend however much it wants.
- Of course, printing a lot of money and not destroying very much money can cause the dollar to lose value and trigger inflation. So the real reason for taxation is to reduce the number of dollars floating around to "make room" for the dollars that the government wants to deploy. Another way to say it is that the government taxes in order to reduce aggregate demand and keep prices under control. A second purpose of taxation is to give dollars value in the first place!
- Not everyone has to pay taxes for this set-up to work. Even if only people whose last names began with "A" had to pay taxes, dollars would still have value to Mr. Aaronson. But Mr. Bozo would still value dollars since he knows that Mr. Aaronson values them. In other words, Mr. Bozo is happy to accept dollars as payment for calculus tutoring, since Bozo can then use those dollars to buy stuff from Aaronson. So they'll both value dollars. To pick a more realistic example, U.S. dollars have value to Canadians even though they (typically) don't have to pay U.S. taxes.
Next time: How does government borrowing work? Is printing money the same as borrowing?
Sunday, July 11, 2010
Intro to fiat money part 1
The mysterious Bob requested a short "course" on how fiat money works. Considering that our economy runs on fiat money and probably less than 1% of Americans understand it, it's probably important to come up with a simple way to wrap one's head around it.
Imagine we all live on an island, isolated from the rest of the world. (This keeps things simple; we'll talk about international trade later.) People on the island obtain goods and services by trading with each other. Whatever merits this system has, it can be very tedious to enter into a transaction. For example, if you're a calculus tutor and you want some salmon, you have to find someone who has a bunch of salmon and wants calculus tutoring. What are the odds of finding that person in a reasonable amount of time?
So the government of the island issues green pieces of paper called "dollars" and lets people trade with dollars. There's just one problem: These pieces of paper have no intrinsic value, so there's no way I'm giving you some of my stuff in exchange for dollars.
Now let's add one more kink that will actually make these dollars valuable. At the end of each year, every island resident (government worker or otherwise) has to pay a tax of $5000. These pieces of paper will be collected and tossed into a shredder. [Alternately, the taxpayer can simply submit a YouTube video of himself shredding the money he owed.] If anyone fails to turn in $5000, he'll be put out to sea in a raft with nothing but a DVD player with Britney Spears videos and "What's Happening!!" reruns.
Now no matter what you think of the idea of having a "head tax", you have to agree that dollars now have some serious value. They're the only form of payment that the government will accept for tax liabilities.
So now dollars have value and people can use dollars for trade. I can buy fish in exchange for dollars because either the fisherman needs the dollars to pay his taxes, or he knows that somebody else needs them for taxes (and thus that guy will trade for them).
One last problem we have to address: Where do people get dollars from? They need to accumulate dollars in order to pay taxes each year, after all. Saying that they get dollars from trading with other people is a cop out, because those people need to get dollars from somewhere. Even if somehow people "started out" with a certain number of dollars floating around, they will eventually be destroyed at a rate of $5000/resident/year.
The answer is that dollars can only come from one place: the government. The government can create and destroy dollar bills and they're the only ones who can do it.
So the island government decides to hire people to do various jobs around the island such as cleaning seaweed off the beach, maintaining the roads, and running a tropical counter-terrorism unit. The employees are paid in dollars. If the government wants to, it could even supplement the supply of dollars by dropping them from a helicopter and letting people find them.
So dollars "start" in the hands of people who sell their services (or goods) to the government, the dollars are used for trade, and they eventually end up in the hands of people who need to pay taxes (government workers or private sector workers alike.)
Now here's a good question to think about: How much does the government "need" to spend each year? As a follow-up, what happens if they spend more or less than that amount?
Imagine we all live on an island, isolated from the rest of the world. (This keeps things simple; we'll talk about international trade later.) People on the island obtain goods and services by trading with each other. Whatever merits this system has, it can be very tedious to enter into a transaction. For example, if you're a calculus tutor and you want some salmon, you have to find someone who has a bunch of salmon and wants calculus tutoring. What are the odds of finding that person in a reasonable amount of time?
So the government of the island issues green pieces of paper called "dollars" and lets people trade with dollars. There's just one problem: These pieces of paper have no intrinsic value, so there's no way I'm giving you some of my stuff in exchange for dollars.
Now let's add one more kink that will actually make these dollars valuable. At the end of each year, every island resident (government worker or otherwise) has to pay a tax of $5000. These pieces of paper will be collected and tossed into a shredder. [Alternately, the taxpayer can simply submit a YouTube video of himself shredding the money he owed.] If anyone fails to turn in $5000, he'll be put out to sea in a raft with nothing but a DVD player with Britney Spears videos and "What's Happening!!" reruns.
Now no matter what you think of the idea of having a "head tax", you have to agree that dollars now have some serious value. They're the only form of payment that the government will accept for tax liabilities.
So now dollars have value and people can use dollars for trade. I can buy fish in exchange for dollars because either the fisherman needs the dollars to pay his taxes, or he knows that somebody else needs them for taxes (and thus that guy will trade for them).
One last problem we have to address: Where do people get dollars from? They need to accumulate dollars in order to pay taxes each year, after all. Saying that they get dollars from trading with other people is a cop out, because those people need to get dollars from somewhere. Even if somehow people "started out" with a certain number of dollars floating around, they will eventually be destroyed at a rate of $5000/resident/year.
The answer is that dollars can only come from one place: the government. The government can create and destroy dollar bills and they're the only ones who can do it.
So the island government decides to hire people to do various jobs around the island such as cleaning seaweed off the beach, maintaining the roads, and running a tropical counter-terrorism unit. The employees are paid in dollars. If the government wants to, it could even supplement the supply of dollars by dropping them from a helicopter and letting people find them.
So dollars "start" in the hands of people who sell their services (or goods) to the government, the dollars are used for trade, and they eventually end up in the hands of people who need to pay taxes (government workers or private sector workers alike.)
Now here's a good question to think about: How much does the government "need" to spend each year? As a follow-up, what happens if they spend more or less than that amount?
Saturday, July 3, 2010
Don't you hate traffic? Part 3
Ok, one last note about charging people to use the road. It's easy to draw the wrong conclusion from my posts. When people hear about these ideas, some of the ideas that pop into their heads are:
1. "Thank goodness there's a huge tax on parking in some places." Manhattan charges an unbelievable 18.375% tax on parking! (Incidentally, residents can get much of it rebated, but out-of-towners are stuck paying the whole thing. I'm not sure if this has been challenged in court yet). Anyway, taxing parking is totally backwards! What's crazy is that if there's one thing I want people to do with their cars, it's to keep them parked in garages. I don't want those things on the roads during busy times. In other words, road space during rush hour is the scarce resource that needs to be rationed via prices; room in parking garages already is rationed by the owner (since he charges for them).
2. "That's why we have a gas tax." A gas tax is not the stupidest thing on earth. As ESM has pointed out to me in the past, the government spends considerable resources keeping the waters safe for oil shipping, and it makes sense to charge the consumers of the oil. There are other externalities associated with gasoline use, so a tax might make sense. But a gas tax doesn't address the traffic problem very well. The guy driving through Nevada at 2 a.m. might be using a lot of gas but he's creating no traffic congestion. But Marginal Matt, who's driving in Manhattan rush hour traffic uses only a litle gas and creates all sorts of delays and aggravation. That's the guy you want to charge.
3. "God bless the DMV. They charge registration fees for cars." Again, cars aren't the problem; using road space when it's scarce is the problem. There may be good reasons to charge a small fee for having a car (the police now have to track it down if it's stolen, etc.), but rationing road space isn't one of them.
1. "Thank goodness there's a huge tax on parking in some places." Manhattan charges an unbelievable 18.375% tax on parking! (Incidentally, residents can get much of it rebated, but out-of-towners are stuck paying the whole thing. I'm not sure if this has been challenged in court yet). Anyway, taxing parking is totally backwards! What's crazy is that if there's one thing I want people to do with their cars, it's to keep them parked in garages. I don't want those things on the roads during busy times. In other words, road space during rush hour is the scarce resource that needs to be rationed via prices; room in parking garages already is rationed by the owner (since he charges for them).
2. "That's why we have a gas tax." A gas tax is not the stupidest thing on earth. As ESM has pointed out to me in the past, the government spends considerable resources keeping the waters safe for oil shipping, and it makes sense to charge the consumers of the oil. There are other externalities associated with gasoline use, so a tax might make sense. But a gas tax doesn't address the traffic problem very well. The guy driving through Nevada at 2 a.m. might be using a lot of gas but he's creating no traffic congestion. But Marginal Matt, who's driving in Manhattan rush hour traffic uses only a litle gas and creates all sorts of delays and aggravation. That's the guy you want to charge.
3. "God bless the DMV. They charge registration fees for cars." Again, cars aren't the problem; using road space when it's scarce is the problem. There may be good reasons to charge a small fee for having a car (the police now have to track it down if it's stolen, etc.), but rationing road space isn't one of them.
Sunday, June 13, 2010
Don't you hate traffic? Part 2
I have a few different loose ends to tie up from the first installment of Don't you hate traffic? .
First, since I've gotten thousands of emails asking about the title of this post, I'll address that first. It's a reference to The Simpsons (clip here) from back when the show was funny. (Yeah, I'm dating myself here.)
Second, how do you deal with privacy issues involved with tolls? If we use EZ-Pass, do we really want Big Brother knowing where you've been driving? I think there's a good way to get around this, which some politicians might not like: Sell EZ-Pass tags the same way we sell pre-paid disposable cell phones. If you buy an "anonymous" pre-paid unit with $100 on it and throw it away when you're done, then you haven't really given up much personal information.
Now finally, let's throw out this assumption that everyone is the same. Different people dislike traffic to varying degrees. Traffic makes me angry and agitated, but other people are in no rush to get anywhere.
So let's say we have a heterogeneous population and roads that aren't sufficient to accommodate everybody. One day I look outside and see 1000 cars on the road, which translates into 2000 units of traffic, using my super-secret traffic grading system.
Presumably, there are some people on the road who really value the road and/or don't particularly mind traffic. Perhaps they're willing to deal with up to 5000 units of traffic at this time. Every single one of them is on the road right now, because after all, there are only 2000 units of traffic out there.
There are also some people who are willing to deal with 3500 units of traffic, some people who can tolerate 2200 units of traffic, etc. and they're all driving now too.
But then there's a guy (call him Marginal Matt) who will only tolerate 2001 units of traffic. He's still driving (since there's only 2000 units) of traffic, but he's getting very little advantage out of having the roads available to him.
Here's the problem: If he would get off the road, there would be a little less traffic for the other 999 people. By deciding to drive, Marginal Matt is creating 2 units of traffic that all of those 999 other drivers has to suffer through and he's only getting 1 unit of advantage to himself.
In other words, he's creating thousands of units of harm and only getting one unit of benefit. Clearly, we need a pricing scheme that gets him off the road.
The optimal toll would balance these two effects. Switching to dollars, if the optimal toll was $10/mile, then there would be much fewer people on the road -- say 600 people instead of 1000. And if the toll is set correctly, then adding that 601st person would create exactly as much economic benefit to him and it would collectively take away from all the existing drivers.
One pleasant aspect of this is that only the people who value the roads the most will use it, and they'll be the ones paying for it. The people who walk to work and then pay an insane city income tax to help pay for roads are getting a raw deal under the current system. Their taxes could be reduced and we could have the drivers pay for the road. The result would be would be less traffic, more business activity (thanks to the lower taxes) and the roads would provide much more value to the residents.
Now I don't know what the optimal toll is, but I know that people do study this sort of thing and have attempted to put a price on traffic.
This system ideally would also end the "need" to subsidize mass transit. It drives me crazy to hear people say that we need to subsidize the subway in NYC since the alternative would be even more nightmarish traffic. When the idea of congestion pricing on roads is suggested as an alternative, people complain that that would increase the price of doing business, which would "get passed on to consumers".
While I don't have the time to delve into all the fallacies embedded in this nonsense, suffice it to say that if we priced roads correctly, a lot of people would take mass transit because it would be much, much cheaper than driving, and in the case of buses, it would be pretty fast (since traffic would be less severe).
In any case, how is it fair that my friend who walks to work has to subsidize the subway? How 'bout charging me for the subway ride that I take to work and charge Marginal Matt a buttload for the amount of congestion he's causing during rush hour?
First, since I've gotten thousands of emails asking about the title of this post, I'll address that first. It's a reference to The Simpsons (clip here) from back when the show was funny. (Yeah, I'm dating myself here.)
Second, how do you deal with privacy issues involved with tolls? If we use EZ-Pass, do we really want Big Brother knowing where you've been driving? I think there's a good way to get around this, which some politicians might not like: Sell EZ-Pass tags the same way we sell pre-paid disposable cell phones. If you buy an "anonymous" pre-paid unit with $100 on it and throw it away when you're done, then you haven't really given up much personal information.
Now finally, let's throw out this assumption that everyone is the same. Different people dislike traffic to varying degrees. Traffic makes me angry and agitated, but other people are in no rush to get anywhere.
So let's say we have a heterogeneous population and roads that aren't sufficient to accommodate everybody. One day I look outside and see 1000 cars on the road, which translates into 2000 units of traffic, using my super-secret traffic grading system.
Presumably, there are some people on the road who really value the road and/or don't particularly mind traffic. Perhaps they're willing to deal with up to 5000 units of traffic at this time. Every single one of them is on the road right now, because after all, there are only 2000 units of traffic out there.
There are also some people who are willing to deal with 3500 units of traffic, some people who can tolerate 2200 units of traffic, etc. and they're all driving now too.
But then there's a guy (call him Marginal Matt) who will only tolerate 2001 units of traffic. He's still driving (since there's only 2000 units) of traffic, but he's getting very little advantage out of having the roads available to him.
Here's the problem: If he would get off the road, there would be a little less traffic for the other 999 people. By deciding to drive, Marginal Matt is creating 2 units of traffic that all of those 999 other drivers has to suffer through and he's only getting 1 unit of advantage to himself.
In other words, he's creating thousands of units of harm and only getting one unit of benefit. Clearly, we need a pricing scheme that gets him off the road.
The optimal toll would balance these two effects. Switching to dollars, if the optimal toll was $10/mile, then there would be much fewer people on the road -- say 600 people instead of 1000. And if the toll is set correctly, then adding that 601st person would create exactly as much economic benefit to him and it would collectively take away from all the existing drivers.
One pleasant aspect of this is that only the people who value the roads the most will use it, and they'll be the ones paying for it. The people who walk to work and then pay an insane city income tax to help pay for roads are getting a raw deal under the current system. Their taxes could be reduced and we could have the drivers pay for the road. The result would be would be less traffic, more business activity (thanks to the lower taxes) and the roads would provide much more value to the residents.
Now I don't know what the optimal toll is, but I know that people do study this sort of thing and have attempted to put a price on traffic.
This system ideally would also end the "need" to subsidize mass transit. It drives me crazy to hear people say that we need to subsidize the subway in NYC since the alternative would be even more nightmarish traffic. When the idea of congestion pricing on roads is suggested as an alternative, people complain that that would increase the price of doing business, which would "get passed on to consumers".
While I don't have the time to delve into all the fallacies embedded in this nonsense, suffice it to say that if we priced roads correctly, a lot of people would take mass transit because it would be much, much cheaper than driving, and in the case of buses, it would be pretty fast (since traffic would be less severe).
In any case, how is it fair that my friend who walks to work has to subsidize the subway? How 'bout charging me for the subway ride that I take to work and charge Marginal Matt a buttload for the amount of congestion he's causing during rush hour?
Friday, June 4, 2010
Vitamins pills and oil spills.
I recently saw Bjorn Lomborg on television talking about how to get the most bang for your buck when it comes to improving global welfare. (He wrote an article about this in the Wall Street a while back, and it's worth reading.)
He pointed to an economics study done that prioritized different projects that could improve the world:
(This is from his WSJ article mentioned earlier.)
So if you had a bunch of money to spend, you could either provide micronutrients to the world's poor or decrease global temperatures (in 100 years) by a tiny fraction of a degree.
Of course, going to micronutrient rallies doesn't help you meet women or make you seem as trendy as getting worked up over various environmental causes.
Ok, fine. But what does this have to do with oil spills? Steven Landsburg made the point today that people get very worked up over the gulf oil spill, but there are bigger economic disasters that a lot of people aren't even aware of:
I can't argue with that. Every single year, we incinerate hundreds of billions of dollars through economic distortions, thanks to the tax code. Does anyone care? If you go to a dinner party tonight (instead of sitting at home, eating Chinese food, and watching Bjorn Lomborg on tv like I'll be doing), are you more likely to hear people lamenting the oil spill or deadweight losses due to taxation? How many people at the party are likely to have heard of "deadweight losses"?
When it comes to world social causes, people are much more likely to get concerned about #30 on the list (global warming) than #1 (micronutrients for the 3rd world). When it comes to economic disasters, people are much more worried about the (admittedly catastrophic) oil spill than a problem that's 30 times as bad.
He pointed to an economics study done that prioritized different projects that could improve the world:
Providing micronutrients -- particularly vitamin A and zinc -- to 80% of the 140 million or so undernourished children in the world would require a commitment of just $60 million annually, a small fraction of the billions spent each year battling terrorism or combating climate change.
(This is from his WSJ article mentioned earlier.)
So if you had a bunch of money to spend, you could either provide micronutrients to the world's poor or decrease global temperatures (in 100 years) by a tiny fraction of a degree.
Of course, going to micronutrient rallies doesn't help you meet women or make you seem as trendy as getting worked up over various environmental causes.
Ok, fine. But what does this have to do with oil spills? Steven Landsburg made the point today that people get very worked up over the gulf oil spill, but there are bigger economic disasters that a lot of people aren't even aware of:
The BP oil spill threatens to cause something like $10 billion worth of damage. That’s pretty bad. By contrast, an extra trillion dollars worth of federal spending threatens to cause something like $300 billion worth of deadweight loss (that is, underproduction due to tax avoidance and disincentives to work). That’s 30 times worse. How is it that so much angst about the former seems to be coming from people with a history of shrugging their shoulders at the latter?
I can't argue with that. Every single year, we incinerate hundreds of billions of dollars through economic distortions, thanks to the tax code. Does anyone care? If you go to a dinner party tonight (instead of sitting at home, eating Chinese food, and watching Bjorn Lomborg on tv like I'll be doing), are you more likely to hear people lamenting the oil spill or deadweight losses due to taxation? How many people at the party are likely to have heard of "deadweight losses"?
When it comes to world social causes, people are much more likely to get concerned about #30 on the list (global warming) than #1 (micronutrients for the 3rd world). When it comes to economic disasters, people are much more worried about the (admittedly catastrophic) oil spill than a problem that's 30 times as bad.
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