The Purposes to Taxation

There are four purposes to taxation.

1: Destroy money. The government doesn’t need to tax to spend money. It just has to write the check. However, money it spends adds to the money supply, and this would cause inflation if an equal amount of money wasn’t taken out of circulation or destroyed. If money is taken out of circulation but not destroyed, as when the government borrows to spend, (which it rarely has any need to,) and this money is accumulated by the financial sector, the potential for inflation remains, and increases as the amount of money in the financial sector increases.

2: Discourage certain behaviors, or, through negative taxes, ie subsidy, (a word for particular forms of spending,) encourage certain (other) behaviors. All spending, of course, encourages the production of what it is being spent on. (Allowing for profits, of course.)

3: Redistribute demand, and therefore wealth. More or less egalitarian societies, such as democracies, cannot survive an excess of economic inequality. Money represents economic rights. That is, economic rights are proportional to wealth and income. Economic rights cannot be completely separated from political rights. An unequal distribution of economic rights results in an unequal distribution of political rights. This phraseology, however, is sort of a contradiction, since political rights may implicitly be regarded as those rights held, and that wealth shared, equally by all citizens in a society. Precisely: The only difference between economic rights and political rights is the method of allocation, and their resulting distribution. A more proper phrasing, then, would be that increasing economic inequality results in an increasing conversion of political rights to economic rights. A sufficiently progressive tax system can prevent this from arising, and so help to maintain a system of political rights. An egalitarian government, therefore, will tax economic rights, so limiting the scope and degree of inequality, and subsidize political rights, so enlarging the scope and degree of equality. The dynamics and stability of this process is itself interesting, but beyond the scope of this question. However, the first goal of every proto- oligarchy is the reduction of the progressivity of taxation to a level insufficient to prevent the increasing of economic inequality.

4: Validate its currency. By requiring that taxes be paid in its unit of money, the use of that money is (very strongly) encouraged in that economy. Since using a single unit of money increases economic efficiency, this increases the quantity of free resources in that economy. This increases both the rate of sustainable consumption, and the rate of wealth accumulation in that economy.

On the Social Benefits of Taxation II

On The Social Benefits of Taxation II                                               

Taxation has historically been considered to be a burden on the productive capacity of an economy.  However, it is easy to show that taxation can increase the efficiency of an economy by rendering inefficient producers unprofitable, and so eliminating them.  What is eliminated from a particular market by proper taxation are the most marginal producers, and the least avid consumers.    Under judicious taxation, as a result of this increase in efficiency in the use of resources, the services of government can largely be provided for for free.  That is, resources which would be applied in some inefficient productive process, and so largely wasted, may be applied more efficiently in providing economically useful government services. And many of the services provided by government, by eliminating many of the costs of transaction and overhead that producers would otherwise bear, also act to increase the efficiency of the private productive economy.*  Inadequate taxation, and the necessary reduction in economically useful services purchased with these taxes, far from increasing the competitiveness of an economy, decreases it, and nations with an inadequate public sector are at a competitive disadvantage with respect to foreign producers in countries with more robust public sectors. Further, even with the light tax burden, the citizens of countries with small public sectors are less provided for, and are a greater burden to the industry of that country, than countries with a larger government service sector. 

We show this in Diagram 1.  Where the marginal benefits attained at higher cost are forgone, the resources which would have been spent to obtain those marginal benefits are instead available to be expended more efficiently in other sectors of the economy.

In the diagram, the tax wedge is the difference between the price paid, P’, and the income received by the producer, P*.  The total tax revenue, the pale green block in each market defined by: Q’ x (P’ – P*) is the welfare received by government.  The lower brighter green triangle is the producer surplus; the upper brighter green triangle the consumer surplus. In each particular market, with the application of a tax wedge the ratio of social welfare obtained to costs, that is resources expended, increases from about two to one, roughly the ratio of the all the greenish areas to all the pinkish areas in each market, to almost four to one, the ratio of the solid green areas to the solid pink area. Although we have drawn the diagram for two particular and identically composed markets, it is apparent that for a wide variety of supply and demand diagrams, and thus for a wide variety of economic sectors, the application of a tax wedge will result in a large increase in economic efficiency. By implication, the opportunity costs of the small amount of marginal benefits forgone are huge.  Indeed, we may expect this improvement to be even better than it initially appears, since we would expect the most marginal producers to be those most eager to externalize much of their costs in order to remain competitive.  Pressure to externalize costs is thus also reduced on the more efficient producers. The economic results from failing to apply a tax wedge in a market are, apparently without exception, far inferior

Historically, of course, this relatively small region of forgone welfare has been labeled “deadweight loss,” the "Harperger Triangle," whose existence has been considered a counter-argument to the efficiency and usefulness of taxation. Indeed, the very pejorative “deadweight loss,” has been used by those ideologically opposed to any government intervention in an economy as a justification for their position. However, their argument, and the economics profession as a whole, has totally over-looked the high opportunity costs involved in the creation of these marginal benefits.  Taking these costs into consideration inverts the conclusion:  The gain in freed resources, in almost any reasonable scenario, totally outweighs any gain involved in wastefully spending these resources for these relatively small benefits.  Indeed, in the scale of economic activity, these resources are much more wisely spent elsewhere.  And the tax wedge causes this to happen.  Far from being a burden, taxation in a market, and at what is traditionally considered a rather high level of taxation, can yield much closer to optimal economic results. .

I leave it to those ideologically opposed to government intervention to find those exceptions. I do observe that the apparent requirement for monotonicity in the supply and demand curves would seem to make finding these exceptions difficult. 

One interesting argument, though, which remains, is the argument from liberty.  This argument would seem to suggest that the wanton destruction of scarce resources is, somehow, ‘liberating.’ Indeed, we might almost define a wealthy individual as a person who has the power to inefficiently consume and waste and destroy large quantities of such resources. Indeed, the production of costly rich boy toys, of little to no benefit to the rest of society, can be considered a "Harberger Triangle" which could, and should, be taxed away. (Even the game Monopoly(TM) has a "Luxury Tax," though totally inadequate to the needs of its little society.)

The 'argument from liberty' would seem, for example, to be the argument against higher gasoline taxes in the United States. The case shown here is that a higher gasoline tax, with money more efficiently spent on public transit, would free up resources for everyone, as the European experience seems to show.  And in the US, the situation is even worse, since the production of oil and oil products is subsidized, and the price kept depressed.  The reality is, however, that the production of real resources cannot be subsidized.  While the notional price may be kept down, this can only be done by higher taxes on the real value of other economic necessities.

This is simple physics. And by the triangle inequality, such taxation of one necessity to subsidize the production of another has its own cost, and the net result is a reduction in the total real value of resources available to society.  Society is the poorer as a result.

There does remain the issue of determining the balance between efficiency and quantity of production in any particular market required for the proper functioning of an economy.  Considerations of scale indicate that, contrary to what is shown in the diagrams, the first unit of anything is seldom the most efficiently produced.  Rather, there is an optimum scale of production, that which minimizes the average cost, (This ignores issues of demand.) and we must consider this to be true for an entire economy as well as for a particular production process.  While with this consideration the improvement in economic efficiency would not be as great, it must still be expected to be impressive.

Further, it should be easier to tax economic wants as opposed to economic needs.  (Although see problem three, below.) A more efficient economy, however, needs less, and is more capable of servicing wants.  

 “Deadweight loss” is also found in other market situations.  It would seem that, at the least, these other situations also need to be re-examined.

For example, the most marginal producers and the least avid consumers in a particular market can also be eliminated when the costs of production are increased by the costs of meeting a regulation. (It is cheaper just to make the cost of not doing nasty things marginally cheaper.  The nasty thing tax will restrict supply of benefits by forcing the internalization of costs. We accepted the pollution of our wor(ld)k for the individual benefits they provided. But with great inequality, for most of society (>85%) the benefits of for the individual outweigh the costs to societ(ies)y (value to the individual) (benefits)These kinds of regulation also can increase economic efficiency.  Unlike the cost to the producer imposed by a tax, however, the government does not directly recover the costs imposed by such regulation. These costs are instead spent meeting the requirements of the regulation. In Diagram 2, P* is the price retained by the producer, which is the price P’ paid by the consumer, minus the cost to the producer of meeting the regulation.

Instead of the tax wedge, we have the revenue in the area Q’ x (P’ – P*), revenue which with a tax wedge would be going to the government, going instead to pay for meeting the regulation.  The benefits are reaped by other sectors of society. A regulation against pollution, for instance, benefits the consumers of an otherwise contaminated resource.  As such, it essentially represents a rightward shift in the supply curve for this resource.  (Similarly, an increase in pollution of a resource represents a leftward shift in the supply curve of that resource.)   This increase in economic efficiency does provide compensation to the economy at large for the cost of the regulation. 

Further, the purpose of regulation is to attain some benefit for the economy which cannot be captured in some unregulated market, and which is presumably greater than the cost of the regulation.  While one might hope, and expect, that the benefit to society of the regulation would be at least equal to its cost, it can be seen that, because of the increase in economic efficiency, society can gain even when the direct benefits from the regulation are substantially lower than its cost to the producer.  (For the same reason, although one can hope, and the government should of course try, to make sure that the direct benefits to society of its expenditures are equal to the costs, even when the direct benefits of government expenditure are below their costs, there can still be a net gain to society, if these resources are not too thoroughly wasted.)  Certainly, in the provisioning of an economy’s necessities, the inefficient application of scarce resources may be necessary. However, even in these situations, alternative and more efficient means of supply may be found.   

Interestingly, however, applying a tax wedge, or imposing regulation, or other forms of government intervention, such as price ceilings or price floors, are not the only ways to increase economic efficiency.  Monopolies also eliminate much inefficient production of goods and services, as shown.

Monopolies produce at quantity Q_M, (Diagram 3) the quantity where the increase in cost for producing another unit equals the increase in revenue for selling another unit.

 This quantity maximizes their profit.  (This is different from a competitive market, where the sum of production of all firms would be where the Marginal Cost, or the Supply curve, intersects the Demand curve.) With monopoly, the striped areas are the costs (Red striped) and benefits (Green striped) forgone by society. These resources which would otherwise be consumed, these costs, may be more efficiently applied to other sectors of the economy. The solid areas are costs borne (Red) and benefits provided (the Greens) under monopoly.  The light green regions are monopoly profits which, since a monopoly is a part of society, does count as an increase in social welfare. We may expect something similar with monopsonies, and to a somewhat lesser extent, with oligopolies, and oligopsonies. With oligopolies and oligopsonies, we would expect a greater elimination of inefficient production when they are collusive, and a less but a still significant degree of elimination when they are competitive. With oligopolies, although some inefficient producers may be protected because of the higher prices resulting from the reduced quantity produced, (See: anamecon.blogspot.com/2012/02/oligopoly-and-economy.html) a reduced quantity is produced, and those firms which remain in production limit their production to their most efficient processes. The so called deadweight region of forgone costs and forgone production lies between the kink in the demand curve, the equilibrium point for oligopolistic producers, and what would be the competitive equilibrium which would result from the production of many small firms. 

To return to monopolies, the great majority of benefits accrue to the owners of the monopoly, typically a small minority of the members of society.  The consumer benefits, on the other hand, are much less, and much reduced from the competitive case. Indeed, by comparing the tax wedge in a competitive market with the monopoly case, we find the social welfare under monopolies is exactly the same as social welfare under a government tax wedge, where the wedge is such that the marginal cost to producers equals their marginal revenue.  The competitive case results in a more equitable distribution of benefits between consumers and producers. Of course, consumer benefits per se are also much less under taxation, the same as under monopoly, and the producer surplus much less. However, the government spreads much of its income widely. It is, in its way, both a consumer and a producer. It re-distributes consumption, and capitalizes production, both directly, through capital investments, and indirectly, through subsidy of production, and creation and maintenance of infrastructure. And all of its expenditure, purported to be for the public benefit, does, one way or another, enrich various sectors of the economy.

One problem with the tax wedge, however, because it favors the more efficient producers, it also favors the economic drift toward concentration of ownership, and the creation of oligopolies and eventually monopolies. Narrowly held monopolies cannot be expected to spread their profits.  Neither can monopolists be expected to spend their profits to provide services which increase the efficiency of the larger economy.   Monopolies once formed, and where not widely owned, further to aggravate the natural tendency of economies to concentrate wealth and power, a concentration which leads to economic instability and collapse. This is especially so because the power concentrated in monopolies tends to translate into political power.  And the monopolist must be expected to use this power to further his power, mitigating the impact of the tax wedge on his revenue.  

A second problem is that producers which escape taxation will eventually displace those producers which are subject to taxation. The result will be a reduction in both taxes collected and in economic efficiency.  This problem must be considered especially acute in open economies, where tax paying domestic producers can be expected to be displaced by non-taxpaying (and hence often less efficient) foreign producers.  The interesting implication here is that, while a nation’s economy may be producing less and consuming more, as an increased share of what is consumed is imported, (much of what is considered production actually either enables consumption, or is a form of consumption,) that economy need not be any better off for this increase in consumption.  Because of the decrease in economic efficiency, fewer consumables will be efficiently used, and more of this consumption will be squandered.

A third problem is, of course, the politics of taxation.  Nobody likes to be taxed, and the powerful, more than others, are capable of avoiding it. (This also bears on the second problem.) This first suggests that the markets which serve the wealthy will be the least efficient, even though these are the markets where an economy can most easily bear the loss of marginal producers.  (Marginal producers may be needed in the production of an economy’s necessities.)  And this further suggests that a disproportionate share of an economy will be dedicated to servicing the wealthy, even at the expenses of the necessities of that economy, such as maintenance of infrastructure.  A recent study has shown(1), for instance, that in the United States today, no policies are enacted by the government which are not also approved by the wealthy elite.  An implication of this is that the tax burden upon this elite can only be expected to diminish, and thus that the burden of taxation on the rest of economy and the population can only increase.**

One final consideration.  As an economy increases in efficiency, it inherently becomes less stable, and more vulnerable to collapse. An efficient economy becomes dependent on its efficiency in order to be productive enough to sustain itself.  The greater the efficiency, the greater its dependence.  A reduction in efficiency will result in a reduction of production, perhaps sufficient enough that that economy can no longer sustain itself. 

A particular consideration regarding improvements in efficiency brought about by regulation and the tax wedge, where these increases in efficiency are already established, is that removing or even merely reducing these factors will result in a reduction of that efficiency, and a resulting reduction in the productive capacity of that economy.  That economy may no longer be able to sustain itself. With a critical reduction in production, cascades may result, and the possibility of sectoral and even general collapse.  Great care, therefore, should be exercised in the reduction of the size of tax wedges, or the elimination of any regulation. 

*Efficiency is a multiplicative factor in production, not an additive one. Although unlike thermodynamic efficiency, economic efficiency may be greater than 1, it is also subject to diminishing returns, at least where matters of the production of real goods and services are concerned.

**This statement assumes that the wealthy are actually taxed at all, which my studies indicate is not, in any real sense, the case. Taxation of the wealthy is merely nominal.  Real taxation of the wealthy is only against their future consumption, a future which, for almost all of the wealthy, is ever receding.  However, a merely nominal rate of taxation is not without real consequences for an economy.

(1)Testing Theories of American Politics:  Elites, Interest Groups, and Average Citizens   Martin Gilens and Benjamin I. Page  https://scholar.princeton.edu/sites/default/files/mgilens/files/gilens_and_page_2014_-testing_theories_of_american_politics.doc.pdf

On the Social Benefits of Taxation

On the Social Benefits of Taxation

Here we present a proof, or at least a demonstration, without words. Or labels.  For the cognoscenti, or even just those having some familiarity with Econ 101, the diagrams as they are should be enough to work out the point. And if not, labels to the diagram and explanation will be provided next week.

The result is quite robust.
Please enjoy.

A Few Brief Remarks on Walmart

A few brief remarks on Walmart

We examine some of the effects of Walmart on a local economy, and the nation’s. There is about one store per 100,000 in the US, each with average revenues of about $110 Million.  The revenue of a small retail establishment is about $3 Million, so a Walmart displaces about 35 small retailers, generally locally owned businesses which previously helped provide much of the community leadership.  If we include the earnings of the owners of these businesses, the payroll of the Walmart is less than that previously provided by the sum of the small retailers, so the employment situation is also worsened when a Walmart moves in. 

This calculation, of course, does not include the benefit of the increased consumer surplus provided by Walmart’s always lower prices.  However, if these benefits are limited to an increase in purchases of consumer goods and services, as we would expect since the consumer surplus is widely dispersed among Walmart customers, we would not expect this to improve the capital situation of the community. Indeed, the value existing capital in the community is severely reduced. Downtown commercial rents, for instance, would be severely depressed, as the value of the buildings themselves.

In compensation for this damage, Walmart paid taxes of  $7 Billion on $22 Billion profits, or 31.8%.  But: Public assistance for its employees cost the US government $6.2  Billion last year, so in effect Walmart paid $800 Million taxes on $15 Billion profits, or slightly over 5%.   If instead it had paid its employees the $6.2 Billion more, so they would not need to collect public assistance, it would still have to pay 31.8% on $15.8 Billion. To raise the salary of their employees $1, roughly, they would have to pay out $2. The people at Walmart Headquarters are probably smart, so presumably they have made this calculation also, and given present government policy, optimized it.   Indeed, as the reference indicates, this is probably general behavior among retailers, and other low wage industries.  An interesting problem for economists. 

This calculation is for 2013:

http://www.forbes.com/sites/clareoconnor/2014/04/15/report-walmart-workers-cost-taxpayers-6-2-billion-in-public-assistance/ 

Many of Walmart's employees did receive a raise last year, somewhere between $1 and $3 so the figures have changed a little.

http://fortune.com/2015/06/02/walmart-workers-raise/

But not a lot.

 

Fast food companies do pretty much the same thing:

http://www.forbes.com/sites/clareoconnor/2013/10/16/reports-fast-food-companies-outsource-7-billion-in-annual-labor-costs-to-taxpayers/

So we're probably talking about a comparable manipulation of their tax bill, as well. Nominally, retailers seem to pay a lot more in taxes than they really do, if we subtract the billions and billions of dollars the government has to fork out to support the retailers'  under-paid employees.  So these retailers are not at all quite the good citizens they try to appear to be.

Clearly, a minimum wage where taxpayers have to supplement  the worker's income for them to reach subsistence is inadequate. 

Edited and corrected: 12/2/2019

Regulating the ‘Invisible Hand’

Regulating the "Invisible Hand'

The ‘invisible hand’ has come to imply the idea that the pursuit of narrow self interest by individuals results in the best social outcome.  Adam Smith, who first used the expression, more narrowly applied it to the concept of markets: “specifically that it is competition between buyers and sellers that channels the profit motive of individuals on both sides of the transaction such that improved products are produced and at lower costs.” http://en.wikipedia.org/wiki/Invisible_hand

The generalized idea is not valid.

In general, action by the members of a society must not only be self seeking, it must promote the well being and goals of that society. To put it in economic terms: Society must profit, and the action of individuals must, in that respect at least, be virtuous. Indeed, every prosperous and stable society has elevated the idea of virtue among its citizens, and devised means to encourage it.  Those most esteemed were those who contributed the most to society.  They were those who were held to be the most virtuous, and received the greatest rewards.  Those who were merely self serving were held in contempt, what ever their material income.

While an individual person may or may not be inclined to virtue, a corporation, however, cannot be virtuous, unless forced by law and circumstance of competition.  Only the pressures of competition make a productive corporation stay productive, that and the force of law required to make the corporation internalize its costs. 

For instance, we hear about banks, and other corporations, ‘socializing costs while privatizing profits.'  When this happens, it is no longer certain that the activities of the corporation are actually of benefit to the economy.   These activities may actually harm society, that is make society poorer, and everyone, on average, worse off.  (Though the owners and some of the employees of the corporation may, of course, be better off.)  Indeed, it is always the case that society is the poorer when the externalized costs are greater than the profits the corporation makes.

For the act of production requires the internalization of cost. The very act of production requires the benefits of production outweigh the costs, and if many of those costs are externalized, their weight is no longer determined by the market.  Thus, while the corporation may reap a profit, the costs to society may outweigh the benefits society receives.

This can be seen from the fact that, when all costs are internalized, the net benefit a company makes to society is equal to that company’s profit. That is, society comes out ahead by the profits of the company. If, when all costs are internalized, the company breaks even, then society breaks even.  But if costs are externalized and the company breaks even, then society pays these costs, and loses.

The profits a company makes are what society is willing to pay the company above the company’s costs.  (Note that in a situation with perfect competition, where there are no profits, there is no growth.)  If society is not willing to pay the company above its costs, its activity is only of use to society to maintain society, and the company itself, in their current state of economic activity. The company makes no profits, and does not grow, and society does not grow. 

If costs are internalized, and the costs are greater than society is willing to pay, then society will cut back on that activity.  That is the company is operating at a loss, and it will contract. 

If there are any externalized costs, and these are less than the total profit, then society will grow at a rate less than the company. 

If externalized costs are greater than the profit, then the company will grow, but society will contract. 

Now  the officers of a corporation can only pursue that corporation’s narrow profit.  In a free but limited market, this may yet be beneficial to society.   However, producing corporations are at a competitive disadvantage to corporations which do not produce, but manipulate the economy to enhance their collection of rents from that economy.  Corporations which do not produce need have no real costs, except those they inflict on society for profit. 

Given the opportunity, then, the officers of a corporation must externalize, or socialize, costs, where it increases profits, no matter the harm inflicted on the larger society.  Thus there is always the pressure on a corporation to change into something which is non-productive, a rent collecting corporation, and a parasite on society.    

And while the producer, constrained by competition, might be virtuous naturally, the monopolist and the rent seeker will not be.  The monopolist, unconstrained, will provide a service, perhaps essential to that society, at a cost that society may ill afford, a cost possibly greater than the benefit that service provides.  The rent seeking corporation will extract resources from society without net benefit to that society.

Regulation is necessary, and should be designed to force corporations to internalize costs, which would otherwise be externalized, and discourage the collection of rents, or excess profits. (And one might argue that that is all regulation should be designed to do.  One might also argue that the conservation of stocks of resources is a separate reason for regulation, although this might be under the cover of internalizing all costs.)

Where these costs cannot be directly internalized, they should be countered by government activity, supported by corporate tax. 

Since regulated industries are less competitive, they should be protected against unregulated, and subsidized, competition, especially foreign competition, by tariff, if needed. Indeed, failure to do so results in an economic race to the bottom.  Domestic producers are forced to externalize costs onto their society, or go out of business. This process is essentially the taking of resources out of the market, destroying it. It is the exportation of demand.

A nation should in any case be more concerned with securing its domestic market for its own industry than securing foreign markets.  All countries cannot be net exporters, but all countries can balance their trade. 

Virtue is corrupted where virtue has become a measure of success at self-serving.  A society requires its members to include social costs in the calculation of their profit in order to survive, (since society as a whole must also make a profit) and corporate society, a la Milton Friedman, cannot do this. See:  http://anamecon.blogspot.com/2012/06/milton-friedman-social-responsibility.html

The expansion of the idea of markets to other activities of society is destructive to those activities. And those activities are essential to the function, and even the identity, of society.

Indeed, the idea of the self-serving ‘invisible hand’ is inadequate to explain the stability and persistence of societies. Virtuous behavior, in particular on the part of a society’s leaders, is required for that society to maintain itself and prosper.   Since it may be impossible for the law, even where not co-opted, to restrain corporate behavior, in particular the indiscriminate externalization of costs, the corporate state may be unstable, and incapable of sustaining itself in the long, or even the medium run. The structure of corporations, and their place in society, far from encouraging virtue, may even exert a corrupting influence on their officers, who are also many of society’s leaders.  This is especially true as society’s competitive structure is increasingly replaced by oligopolistic and monopolistic structures.  These structures naturally seek rent and externalize costs.

Unlike people, corporate persons, except as they are constrained by law, cannot be good citizens.  Thus, if the law is inadequate to constrain them, 'Corporate Society' may only exist as a transition state to a decapitalized future.

Regulation may be inadequate to secure the future, but it is nonetheless necessary.

Regulating Oligopoly and Oligopsony

Regulating Oligopoly and Oligopsony

Having concluded there was a need to regulate oligopoly and oligopsony, ( http://anamecon.blogspot.com/2012/03/on-need-for-regulation-of-oligopoly-and.html ) we discuss some ways how it might be done. Other suggestions are welcome.

The problem is the oligopolist produces less than the competitive equilibrium, and at a higher price, while the oligopsonist buys less than the competitive equilibrium, and at a lower price.

 

In dealing with oligopy we wish to decide which oligopies are most damaging.  Those in elastic markets, for instance, would be naturally limited in their ability to extract rents, while those in inelastic markets would have greater opportunity, and given the situation, inclination, to do so.  Similarly, the costs of entry to a market would also set limits on how much extra normal profit could be collected. Low entry costs would limit the extra normal profits to low levels, since higher profits would encourage the entry of other firms into the market.

With damaging oligopy, one way is simply to tax the results. A problem here is getting the receipts back to the damaged parties.  Another problem with this solution is that it would not affect the oligopist’s equilibrium, to produce at higher prices and lower quantity produced than at competitive equilibrium for oligopoly, and to buy at lower prices paid for and a lower quantity than at competitive equilibrium for oligopsony. That is, it would not eliminate bottlenecks in an economy. As may be, this approach would be to tax extra normal profits at a punitive rate, say, 90% of profits over 6% (allowing for a 3% inflation rate.)  The point is, by the time oligopy is manifest, the market is relatively fixed in proportion to the economy as a whole. Yet because of the price scheme of the oligopy, the market is defective in size to the economy, and the rent collected goes into the bank, ie taken out of the economy at large, or goes into buying up assets in the economy at large, increasing the proportion of ownership of the oligop, at the expense of the other members of the economy.  So one would wish to force the oligopy to grow to proportion of and at the growth rate of the economy as a whole.  (This is a mature market problem, not a growing market one.  It is not a problem of a company expanding into an open market, such as Apple, with its product innovations.  Extra normal profits here can still be a problem to an economy, and lead to alterations in the distribution of wealth and power.  But the reinvestment of extra normal profits in plant is also necessary to expand production to meet the demand a smaller company cannot reasonably fulfill.) 

What is desired is that normal profits are allowed to be reinvested in the oligopy, while extra normal profits are returned to the economy at large.  In oligopoly, one might gear the tax to be scaled at 6% on profit per unit produced, (with a 3% nominal rate of inflation, and a 3% rate of growth.). This would be effectively a progressive VAT, or value added tax, on the ologopoly.  This would incentivize the oligopolist to produce to competitive equilibrium, since the maximum profit would then be proportional to quantity produced. (Actually this by itself wouldn’t quite work, as the oligopolist would just be encouraged to internalize costs, so as to reduce his ‘profit’ to the 6%.)   

Another is to institute price floors in the case of oligopsony, or price ceilings in the case of oligopoly, at what one would hope to be nearer the equilibrium price for a perfectly competitive market. One example of price floors, with oligopsonies, is with minimum wage laws.

A problem here seems to be that one loses the use of price signals, although this is actually not a problem with oligopy, since the quantity traded is no longer responsive to prices anyhow.  Or more correctly, the price becomes fixed, and unresponsive over a large variation of economic conditions. In any case, over a large variation, price and quantity do not respond to the demands of the economy. While these price levels could just be legislated, probably a more efficient method would be a competitive buyer, in the case of oligopsony, or a competitive producer, in the case of oligopoly.  In the case of oligopoly, another option might be to subsidize production.  This option, subsidizing production, would fail, however, in all cases but the mildest kinks, that is, where there were numerous competitors in the oligopoly, (or hardly like an oligopoly at all.)  This is because, with a severe kink, the vertical part of the Marginal Cost MC curve extends through the price axis, or at least very close, and thus all or most of the cost of production would have to be subsidized in order to encourage an increase in quantity produced.  Otherwise, the quantity for profit maximization would not change. This would still be useful, in cases like health care, where the goal was universal coverage.  See: http://anamecon.blogspot.com/2010/03/real-problem-with-health-care-in-us.html

Similarly, just buying up large quantities from the oligopoly would be very expensive, since you would be buying at the oligopolist’s price, and providing him his extra normal profit, as is in fact the current US government policy with respect to the health care industry.  Policy should be to force the oligopolist to sell at a price nearer the equilibrium price.  Again, the situation with health care is different, since if you want universal coverage, you want to drive the oligopolist’s price to near zero, and to do so must effectively subsidize the entire production.  That is, make health care a public good. 

In the case of oligopsony, by competitive, we mean a buyer who buys sufficient goods to drive the price up to what it would be under competitive equilibrium.  This buyer would constitute a regulator.  And what would the signals be, that this regulator would look for?  He would seek a normal profit for suppliers. (This assumes that for firms facing the oligopsony, there is no barrier to entry.  If there were such a barrier, we would expect the situation to evolve into one of oligopoly facing oligopsony. Does such a market exist at a competitive equilibrium?  It would seem to depend on the relative elasticities of the supply and demand.)

One way this might be shown would be an equilibrium in firms entering and leaving the market.  This shows how the quantity of suppliers might also be regulated. By increasing the price and quantity bought, firms would be encouraged to enter the market.  By reducing the price and quantity bought, firms would be encouraged to exit the market.

The idea of government being a last resort buyer of labor suggests an alternative to minimum wage laws.  The government would enter the labor market and act as a monopsonist, and bid up wages until the unemployment rate was down to desired levels.  Private industries would have to pay this rate also, or lose employees to the government.

The situation would seem to be more difficult with oligopoly.  The problem with the government producing to competitive equilibrium is that governments are notorious for producing inferior products.  Another problem, as in agriculture and education, is what the government actually does.  That is the government subsidizes production into the face of oligopsonies.   This results in producing a surplus of goods into a buyers market, driving down the prices.  (Indeed, the prices have been driven down so low, in the case of education, that buyers, the institutions of higher education, must be paid to accept most of the production of public education. The prices are negative.  This is an alternative way of looking at the distribution of pricings and cost burdens in education.  On the other end, businesses refuse to pay the universities for the production of the universities, their graduates.  They do not send clear signals as to what they want, except in a few career specific employment and unemployment rates. 

One way to rein in oligopoly is to promote the production of substitute goods.  The development and subsidy of alternative energy sources, for instance, would moderate the action of oil and coal oligopolists, which is one of the reasons they oppose alternative energy sources so fiercely.

   

As another alternative, the government could employ the aggressive use of anti-trust legislation, to prevent the formation of oligopoly. Probably a figure of providing 20% of the market would constitute a member of an oligopoly.  Thus, keeping firms below that size would prevent the kink from becoming too pronounced.  A problem arises, when the oligopoly faces oligopsony, or monopsony, as in retail supermarket chains, with their limited shelf space.   By hindering one, one encourages the other, and oligopsony can be as socially destructive as oligopoly.   

Another possible solution is to separate the functions of the oligopy, making one part into a quasi-utility, and eliminating costs of entry to the other function.  Thus, for instance, (as was done with British rail) providers of cable TVcould be separated into parts, one which merely operated and maintained the cable, and the other which provided the content, paying the operators of the cable a fee.  The operator would be a regulated monopoly, and the content providers would be competitive, the costs of entry, one of the prerequisites for oligopoly, minimized.  The same could be done with cell phones, the towers being regulated, and selling their bandwidth, which they would seek to maximize, for a fee.

Health care in the US is an instance of oligopoly. Actually it is an instance of several different oligopolies.  One is medical equipment supply.  Another is pharmaceutical supply.  Locally hospitals form oligopolies.  (Hospitals are an obvious choice for regulated utility.)  Finally, a limited supply of doctors and other medical personnel creates an effective oligopoly to health care consumers.   Production of health care is restricted, driving up prices. Buying from the oligopoly will not change this, and indeed can be expected to further drive up prices. 

For industries requiring a high level of maintenance of resources, such as farming, further regulation might be required of producers, to prevent depletion of assets in efforts to temporarily acquire extra normal profits.  Progressive taxation would be helpful here, since it increases the present value of future returns, rather than exploitation of the resource for immediate returns.

What is your citizenship worth?

What is your citizenship worth? A monetary value can be put on it. Is it still positive? Is it still worth something positive? Or has it become a burden? It is supposed to be a blessing.

Consider the negative value added to it by the national debt. At about $10Trillion or so, or about $33,000 for every man, woman and child, about $60,000 for every worker. And climbing. Taxes also take away from the value of citizenship, but with taxes, we buy things, and the value of these things adds to the value of citizenship. So add to that the benefits provided by society. Schools, highways, rule of law, etc. What should be a very significant net positive. Hard to put exact figures on them. Perhaps willingness to pay. Plus a premium. When you think about it, schools, law enforcenment, and many other public goods supported by our taxes, really are a bargain.

But in any case, citizenship is worth less than it was before, for most of us:

http://prospect.org/cs/articles?article=the_impunity_of_the_roberts_court

http://prospect.org/cs/articles?article=signing_away_our_rights

But not for some:

http://www.nakedcapitalism.com/2011/04/wachovia-paid-trivial-fine-for-nearly-400-billion-of-drug-related-money-laundering.html

Not exactly the 'shining city on a hill' mentioned by Ronald Reagan. Not exactly an example for others to follow, either. With increasing debt, budget cuts to education and so forth, loss of rights in the workplace, etc, the value of citizenship seems to be decreasing. What will happen if, or when, the value turns negative, the bribes for obedience are no longer enough, and propaganda can no longer hide the fact that citizenship in the United States has, for many, becomes an increasingly onerous burden? Will they sell their citizenship to the highest bidder, by which I mean the rights citizenship confers? Piecemeal, perhaps? Or will the people organize, and reestablish a new citizenship, under new terms?

Who we are governed by

We are governed by incompetents. They are so incompetent they do not even know what competency looks like.

Suppose the economy grows at 3%. Then just by controlling where that 3% is spent, the government can control the direction of the growth of the economy.

Of course, that is just the first approximation. The economy also undergoes change, which does not show up as growth, but investment compensating for depreciation and other asset consumption. This percentage must also be controlled. Further, what is destroyed must also be controlled. It can tax what it wants to destroy, and it can then spend the money to direct investment. This will cause the money to be spent in the direction the government deems desirable. The economy will then grow in the direction the government desires.

And it does this already. A government which is 20% GDP can’t help but direct the economy. That it does so inefficiently, and without much direction, merely means both it doesn’t understand what it is doing, and that some, or a lot, of the ‘growth’ is directed to waste.

What we are talking about is Gross private domestic investment, nonresidential. (Although the government could control the residential as well. It can tax larger mortgages, a graduated mortgage tax. It can tax the building of some houses, and subsidize the building of others.) Nonresidential gross private investment works out to be just under 10 percent of GDP. So by directing that 10 percent of the economy, the government can make it grow any way it desired, and provide any services desired. Well, any way desired that was sustainable. It could do this simply by subsidizing desired services, and taxing the crap out of any other investment.

Of course, it wouldn’t have to be so crude. It could be more measured, taxing according to degree of undesirability, subsidizing according to degree of desirability. If they wanted more health care, they would subsidize its production. Pay for more doctors, more nurses, more hospitals. If they wanted less concentration of wealth, they could tax it. More windmills, subsidize; fewer automobiles, tax. Less financial, tax. More manufacturing, subsudize.

Think this is heavy handed? Look at the ham handed government we have now. Look at the effects of its policy. It is 20% of the GDP, controls more, and what direction do we get from it? Instead of planning, we have special interests, pulling government investment this way and that. Financial has increased to 6%, with more profits than manufacturing. Manufacturing gets little support, and has been in decline for decades. Just 1% of our GDP goes to industrial equipment. That’s the stuff that goes into factories. In agriculture, unsustainable factory farms are subsidized, while family farmers are not. Health care has increased to 17% GDP. (This is not in contradiction to what was said above. This is demand (subsidized) driven inflation as a result of inadequate supply (taxed). The government should do the opposite. Subsidize production, and tax demand.) Infrastructure deteriorates, at the same time demand for it is subsidized. Unemployment is subsidized, employment is taxed.

All this and more is the result of government policy, of its spending, taxation and subsidy, Either that, or the government, spending 20% of GDP, and controlling more, has no effect on the economy. That is, it is essentially impotent. Of course, the government can still be essentially impotent, spending 20% of GDP, if it is locked into its commitments, the captive of special interests, and cannot change the way it spends its money. Like the government we have now.

The Interests of the Wealthy

When the wealthy seize control of government, the wealthy cannot help but destroy the society which supports them.

In the short term, it is in the separate interests of the wealthy to corrupt the system to their benefit. That is, they will seek their own benefits ahead of the people's, first by becoming the instruments of government policy, then by bending government policy to their interests. They will cooperate with each other to do this, and secure advantage over the people. Securing advantage, they will plunder the wealth of the people. This is what (most of) the national debt is. It is what the people 'owe' the rich. Instead of paying taxes, wealthy 'loan' the money to the government, which it then has to pay back. The wealthy have used their power to cause this.

In securing their separate interests, they will cooperate in gaining favors. They will trade for votes. This is not 'zero sum' as regular trade is, but each party gains, and both their influence on, and burden on, government and the people, will expand. That is, through the instrument of government, they each acquire disproportionate wealth. And since all resources are competed for, others, the people, are at a disadvantage. The system becomes rigged.

But then they will compete, they must compete, to secure advantage over each other, and further advantage over the people. The government becomes an instrument of their competition, as they compete for its favors. Those who do not compete will be at a competitive disadvantage.

So all the wealthy are forced to compete against each other. They will compete to cause the government to pursue purposes to their own separate ends,which is the very definition of corruption. These interests, the benefit of the wealthy, harm the system, and the people, necessarily, by the law of externality: Those costs which can be externalized, will be. Thus the costs of the benefits to the wealthy will be laid upon the people, until the wealth f the people is exhausted. We are seeing this happening in the present 'recession.'

But the welfare of the people is essential to the welfare of the wealthy, and where it is destroyed, so is their own welfare. If the destroy the income flow of the people, they destroy their own income flow as well.

A poor society has few rich people. Neither has it much power to project, or even protect its interests.

In the long term, an uncorrupted government serves the interests of the wealthy better. A government can only remain uncorrupted to such degree as the influence of the wealthy is limited.

The people have been losing the competition for their government. They have persistently elected the servants of the rich to office. Now the system is rigged in the favor of the wealthy. Not good.

Cross posted as comment to angrybearblog.com: Maule and Pappas on progressive taxation and the decreasing burden on the rich