Windfall Profits and That Which Is Not Seen
I was the teaching assistant for a course on the theory of property rights during the fall semester of 2002. We spent quite a bit of time discussing rent control, various rent-control cases, and the legal principles that informed judicial decisions surrounding rent-control cases.
One of these principles was an aversion to "windfall" profits. Windfall profits occur when an entrepreneur enjoys profits in excess of what he expected, usually as the result of a drastic change in market conditions.
People often point to the run-up in gas prices — some gas stations were charging over $3 a gallon — after the September 11 attacks as an example of firms enjoying windfall profits. The price per gallon is higher than the cost per gallon. This, it is argued, is unfair, especially when an entrepreneur/business owner enjoys profits that he doesn't have to "work" for.
We often discussed this in terms of what was called the rate-setting equation, in which the court set prices according to the formula
| rate = operating cost + reasonable return |
This ignores two things. First, the definition of "reasonable" is arbitrary. Second, expected prices determine the costs an entrepreneur is willing to incur. As a rule, people don't incur costs and engage in arbitrary productive activity irrespective of expected benefits. In short, the price one expects to receive for a product — say a gallon of gasoline — determines the prices he is willing to pay for factors of production, how he will produce the product, and the quantity he is willing to supply. Prices are not cost determined.
To better illustrate this principle, suppose you are a cotton buyer in 1860s England. Two boatloads of cotton arrive, one from the United States and the other from Egypt. Let's assume that Egyptian cotton and American cotton are perfect substitutes. As a merchant, do you care at all what it costs your suppliers to produce their wares? Suppose you're the one trying to sell the American cotton. Do your costs of production influence the price at which you agree to sell the cotton? At this point, all of your costs are sunk. (Economists are fond of the phrase "sunk costs are sunk," which is to say that there is no way to recover them.) As such, these costs shouldn't factor into your asking price.
Let's return to our discussion of windfall profits as it relates to rent-controlled apartments. The in-class examples concerned rent-control ordinances in Cambridge, MA and Berkeley, CA, which are reportedly nice places to live and where the demand for housing is stronger than in most parts of the country. The "windfall profits" rationale for rent control works as follows: suppose you've owned an apartment complex in Cambridge for 50 years. The apartments cost you $450 a month to maintain, and you can rent them out for $500 a month for a monthly profit of $50 each. Suppose now that the demand for Cambridge apartments skyrockets, and you can now charge $1,000 a month for the exact same apartment. The rent controllers maintain that it isn't fair that you can now enjoy such higher rents without really changing the product you offer or "working for it." Since people supposedly aren't entitled to what they don't "work for," the rent controllers step in and cap rental prices at $500 a month. Everyone should be happy because you're still earning a "reasonable" profit on each apartment, consumers are still able to get cheap apartments, and the Cambridge housing stock has not diminished.
Henry Hazlitt sums up the standard argument for rent control as follows:
Rent control is initially imposed on the argument that the supply of housing is not "elastic" — i.e., that a housing shortage cannot be immediately made up, no matter how high rents are allowed to rise. Therefore, it is contended, the government, by forbidding increases in rents, protects tenants from extortion and exploitation without doing any real harm to landlords and without discouraging new construction. (Economics in One Lesson, p. 111)
As the great proto-Austrian economist Frederic Bastiat points out, however, we should never merely take account of that which is seen. We must also consider that which is not seen — the hidden effects of a policy like rent control. And there is plenty that is not seen in the case of rent control.
First, there are the standard problems associated with holding prices below the market-clearing price, all of which are taken out of an everyday "Principles of Microeconomics" textbook. Queuing (people waiting in line for the good, in this case, apartments) and nonprice competition will set in. People will try to get apartments by making bribes or other side payments. Landlords may let their property deteriorate. Landlords may withdraw from the housing market and convert their apartments to offices. Et cetera.
But this is only the tip of the iceberg. Let's consider the normative issue first. In this situation, rent controllers objected to windfall profits for the landlord. But what of the renter who has the good fortune to secure for $500 an apartment for which someone else would gladly pay $1,000? This is just as much a windfall as anything else. Moreover, the rent-control board either consigns the second renter to the winds of fate — he will, in all likelihood, be banished to a waiting list — or shuts him out of the housing market altogether because his willingness to pay is not allowed to manifest itself through the market process.
Moreover, rent control distorts the structure of production by nullifying the valuable signaling role of profits. High profits induce others to enter a market. In this case, high profits signal that there is quite a bit of money to be made in the Cambridge housing market. One of the fundamental precepts of economics is that people respond to incentives; something has to induce people to engage in productive activity (supplying apartments, in this case). They don't just do so ad hoc. It may very well be that some people are willing to absorb heavy losses to supply cheap, high-quality apartments out of their compassion for the hardscrabble lives of Harvard, MIT, and Berkeley students and faculty who are trying to eke out a living in the unforgiving world that is academe.
Of course, what motivates most people is the prospect of being able to do more of the things they like, whether it is consuming Coca-Cola, alleviating third-world poverty, or reading economics articles. Regardless, wealth helps. Therefore, the prospect of increasing one's wealth is quite often the driving force that motivates behavior.
Let's look at who wins and who loses. The rent control board certainly wins; passing additional rent control measures usually solidifies their employment. Incumbent tenants and those lucky enough to get a cheap apartment win because they get a good at a price below that which would clear the market. People pushing for rent control "win" in the sense that they get to feel good about striking a blow for justice.
Let's look at what Henry Hazlitt had to say about attempts to hold prices below their market-clearing levels in his classic Economics in One Lesson:
Now we cannot hold the price of any commodity below its market level without in time bringing about two consequences. The first is to increase the demand for that commodity. Because the commodity is cheaper, people are both tempted to buy, and can afford to buy, more of it. The second consequence is to reduce the supply of that commodity. Because people buy more, the accumulated supply is more quickly taken from the shelves of merchants. But in addition to this, production of that commodity is discouraged. Profit margins are reduced or wiped out. The marginal producers are driven out of business. Even the most efficient producers may be called upon to turn out their product at a loss.
He continues:
If we did nothing else, therefore, the consequence of fixing a maximum price for a particular commodity would be to bring about a shortage of that commodity. But that is precisely the opposite of what government regulators originally wanted to do. For it is the very commodities selected for maximum price-fixing that the regulators most want to keep in abundant supply. But when they limit the wages and the profits of those who make these commodities … they discourage the production of the price-controlled necessities while they relatively stimulate the production of less essential goods.
And this is the consequence of the state attempting to control the price of any good. It is often objected that "necessities" such as food, housing, education, and health care are too important to be left to the wiles and whimsies of the market.
The reader may have seen a bumper sticker reading "health care is a right, not a privilege." This certainly makes for convenient political rhetoric, but when we get past the newspaper headlines, we see that we're dealing with issues of mind-boggling complexity.
The principles by which market forces allocate resources aren't particularly difficult to grasp. People agree to exchange because they expect to be better off as a result, and those who are willing to pay the most generally get their desired quantity of a good in question. So the market's mechanisms for allocating resources aren't that mysterious.
We run into problems when we start talking about a good being a "right" that should be provided by someone (presumably the state) irrespective of market forces or one's ability to pay. The most apparent problems arise when we start to consider exactly what the concept of a "good" entails.
Goods are extremely specific things. They are characterized by definite physical, spatial, and temporal characteristics — in other words, we're concerned with the "what, where, and when" of a good. For example, suppose I have an ice cream cone after lunch. The good "ice cream" is characterized by certain physical properties (it's a soft, cold substance of a particular chemical composition), certain spatial properties (in all likelihood, it's at our local Kroger), and certain temporal properties (after dinner).
While it isn't hard to wrap our minds around the goods-character of ice cream, serious difficulties become apparent when we start to think about more abstract classes of goods such as "health care" or "housing." First, "health care" and "housing" are descriptors used to classify broad arrays of goods and services that are very costly to measure and may not be interchangeable. If we go back to ice cream for a second, we see that one vanilla ice cream cone is usually a perfect substitute for another. Moreover, it's easy to substitute chocolate for vanilla, gelato for ice cream, and waffle cones for sugar cones. It isn't easy to substitute the services of a urologist for the services of a gynecologist (for example).
So what are we talking about when we talk about "health care?" Do we mean brain surgery? Do we mean basic physicians' services? Do we mean aspirin?
Similarly, what are we talking about when we talk about "housing?" Basic shelter might consist of a lean-to or a mud hut. Do we mean penthouses in midtown Manhattan? Most so-called progressives would say that the "housing crisis" is characterized by a shortage of "adequate" housing, but who is to decide what is "adequate?" My wife and I have a three-bedroom house. On some margins, this is more than adequate. On some margins, though, it is inadequate. I'd like to have a bigger desk, but the guest room is too small. We don't have space for another couch in the living room, but it would be nice. Do we have a right to all of this at someone else's expense?
Market prices turn incomprehensibly complex relationships into very simple ones. Government policy does the opposite. It turns the simple into the extraordinarily complex, and, as Ludwig von Mises has argued in various places, government intervention in one aspect of the economy will displace resources, change prices, and likely lead to calls for government intervention in other areas of the economy. Establishing the boundaries and definitions of what constitutes "just" and "unjust" outcomes presents one set of problems, and measuring the valuable attributes of the goods and services that are to be regulated or subsidized presents another. At the very least, these problems should cause us to view government intervention with a skeptical eye.
Can China Transform its Mode of Growth?
Practically since the beginning of the "reform and opening" period in 1978, China's central government has sought to shift from an extensive to an intensive development model — from growth based on capital accumulation to growth based on improvements in productivity. This year, however, while the planners continue to talk about the need for this long-sought-after transformation, they are moving in exactly the opposite direction, counting heavily on state-sponsored investment to keep the economy growing in the wake of the global financial crisis.
This is not surprising as they have had little success in transforming China's mode of growth, even under much more favorable circumstances. While this objective has been emphasized in every five-year plan since 1981, gross-fixed-capital formation has risen from 33% of nominal GDP in that year (as calculated by the expenditure method) to 42% in 2007.
A Missed Opportunity
Perhaps the best opportunity there has been to make progress on this issue came in 2001, the first year of the tenth five-year plan, which called for "taking structural adjustment as the main line." At that point, it could be argued, China had reached the level of self-sufficiency in industrial raw materials necessary for such a strategy to be feasible. And by then the unsustainability of the traditional model was already quite clear. In an address to the March 2001 meeting of the National People's Congress, premier Zhu Rong-ji even went so far as to say that "further development will be impossible without adjustment." Continued investment-driven growth, he argued, would only result in excess supply and put an unsupportable burden on China's resource base and natural environment.
But even with such unambiguous central-government backing, no adjustment was forthcoming. In fact, from 2001 to 2007 the ratio of gross-fixed-capital formation to GDP actually rose by four percentage points. And despite the tenth plan's call to reduce overproduction, redundant investment has led to severe overcapacity in a number of sectors. Excess capacity has been estimated at 50% or more for automobiles, ferrous alloys, and semiconductors, and 30% for steel. The latter translates into about 180 million tons per annum — greater than total US annual production!
Chinese economists generally attribute this policy failure to the difficulty of "system reform" — administrative change designed to increase the efficiency of the state sector — but seldom have much to say about why this is so hard to achieve. Their reticence on this point is not surprising, as the root of the problem is China's authoritarian regime itself.
Decentralized Knowledge
Any attempt at economic rationalization will inevitably meet with strong resistance from powerful people who stand to benefit from preserving the status quo. For example, local officials have for years blocked attempts to close small, inefficient plants that create economic growth in their jurisdictions and thereby improve their career prospects. Similarly, central government directives to avoid redundant infrastructure projects are often all but impossible to carry out because of the opportunities such investment affords the well-connected to "wet their beaks."
A more fundamental problem has to do with the nature of intensive growth itself. Unlike extensive growth, which is at least amenable to central planning, the innovation required for intensive growth relies on what Hayek referred to in his seminal 1945 paper on "The Use of Knowledge in Society" as "knowledge of the particular circumstances of time and place."
This type of knowledge, he pointed out, is "dispersed among many different individuals" and "by its nature cannot enter into statistics and therefore cannot be conveyed to any central authority in statistical form." Thus, as the Austrian economist Randall Holcombe put it in his 1998 article, "Entrepreneurship and Economic Growth,"
"central planning precludes entrepreneurship, which is necessarily decentralized in nature."
Clearly the central government cannot carry out a strategy based on improving productivity growth in the same way that it could implement an extensive growth policy such as increasing petrochemical production or expanding the railway network. Intensive growth can really only be carried out by the "man on the spot" (as Hayek put it) as only he is in a position to notice the opportunities for the necessary innovation.
The Leadership of the Party
Not only this, he must also have the right incentives, and in China these are often missing. While there is no shortage of Chinese entrepreneurs, their efforts tend to be directed as much toward improving relationships with local officialdom as with increasing economic efficiency. In many cases, as Mises wrote in 1949 of the totalitarian systems of his day, "social competition manifests itself in the endeavors of people to court the favor of those in power" rather than in attempts to build a better mousetrap.
While Chinese officials continue to emphasize the "new" strategy of moving towards intensive growth there is thus no reason to expect that this will be possible even once the situation has gotten "back to normal" and infrastructure spending is no longer necessary to support the economy. The problem is not really economic but political. And as long as "the leadership of the Party" and "Marxism, Leninism, Mao Ze-dong thought" remain enshrined in the preamble to the Chinese constitution, the solution is likely to remain as elusive as ever.
Ben Bernanke vs. The Journal on Inflation
Slack Labor Markets Will Hold Down Prices
Don't worry about commodities or the exchange value of the dollar.
Editor's note: The Federal Reserve recently released the transcripts of the 2003 meetings of its Federal Open Market Committee, which determines monetary policy. The following are the remarks at the Dec. 9, 2003 meeting by Ben Bernanke, then a Fed governor who succeeded Alan Greenspan as chairman in 2006. A related editorial appears nearby.
Thank you, Mr. Chairman. The economic news since our last meeting has been heartening. The odds that we have begun a strong and sustainable expansion have risen significantly. Because of the rise in growth, we're going to see even more op-ed articles, wire stories, and editorials opining that the Fed needs to tighten soon to avoid a repeat of 1980s-style inflation. The Wall Street Journal today has an editorial along those lines.
I believe these critics are not particularly well informed and that, as a Committee, we should continue to remain patient and not choke off growth unnecessarily. In particular, though of course we have to be vigilant to detect any change in the inflation trend, the odds of inflation rising significantly any time soon from its current very low level seem small.
Let me make a few points. First, those on the Street and elsewhere who lately have been worrying about inflation have tended to point primarily to raw materials prices, which have been rising, and to the dollar, which has been falling. Here I will largely reiterate some things that [Fed staffer] Dave Stockton said. The Board staff's Monday briefing, which I believe has been posted electronically, debunked the importance of the raw materials argument quite convincingly in my view.
The briefing includes a graph of the historical data, which shows that even very large movements of raw materials prices -- which are quite common by the way -- appear to have muted effects on intermediate goods prices and, most important, no discernible effects at all on final goods inflation. Presumably this lack of inflationary impact reflects the fact that raw materials are only a small part of total costs. As another figure in the briefing showed, unit labor costs -- which, of course, have been falling rapidly as productivity has surged and wage growth has slowed -- are far more important in inflation determination than are materials prices.
An analysis similar to that for raw materials would apply to the dollar. As we've been seeing, large movements of the dollar against major currencies tend to translate into smaller movements against the U.S. trade-weighted basket of currencies and into still smaller effects on import prices because of imperfect pass-throughs. Nonoil import prices, in turn, are a relatively modest part of the overall price index. In short, the ultimate effect of the dollar depreciation of the magnitude we have seen on broad measures of core inflation is likely to be quite small indeed.
I noted the key role of unit labor costs in inflation. Of course, unit labor costs will not continue to fall at the recent rate. Indeed, as employment picks up, productivity growth in particular will slow markedly. Critics may point to this decline in productivity growth as another incipient source of inflationary pressure.
I would just note that this prospective productivity decline is fully incorporated in the Greenbook forecast....
Finally, although output gaps are of course very hard to measure, the weight of the evidence continues to support those who believe that considerable slack remains in the economy. Let me give one bit of evidence on this point. The recent New York Times article by Chicago economist Austan Goolsbee argued that the rise in the unemployment rate in the past two years understates the degree of labor market weakness.
The reason is that today a large percentage of job losers, a greater fraction than in the past, simply withdraw from the labor force, for example, to apply for Social Security disability benefits. I looked at data on the ratio of employment to the working age population, which combine information on both unemployment and labor force participation and found that they confirm this general observation.
Between its peak in April 2000 and its trough this past September, the employment-to-population ratio fell 2.8 percentage points. With the strong gains in the household survey of the past two months, the net decline in the employment-to-population ratio since 2000 is still 2.4 percentage points. For comparison, the combination of the 1980 and 1981-82 recessions, during which the unemployment rate peaked near 11%, produced a peak-to-trough move in this ratio between September 1979 and February 1983 of 3.0 percentage points. The decline attributed to the 1981-82 recession alone from its local peak in April '81 until February '83 was 2.5 percentage points. So on this particular metric -- and of course it's only one metric -- the deterioration of the labor market from 2000 until now is comparable to what occurred during the deep 1981-82 recession. For comparison, the movement in the employment-to-population ratio from its peak to its trough during the 1990-91 recession period was 2.0 percentage points.
Possibly the extent of the recent decline is exaggerated because employment was unsustainably high in 1999 and 2000. However, even relative to a more neutral benchmark of 5% unemployment and a participation rate at its long-run trend, current household employment -- the more optimistic of the surveys -- remains some 2.9 million jobs below normal. That number fully incorporates the rise in self-employment about which much has been made. On balance, the large decline in the share of the population that is working suggests that employment can rise significantly before we see pressure on wages and unit labor costs.
To summarize, vigilance on inflation is absolutely essential. I do not disagree with that one bit. But we should not overreact to purported signs of inflation that are in reality no such thing. Thank you.
Investors Remain Cautious; Fed, Auction in Focus
Stocks crept lower Tuesday as investors mulled weaker-than-expected housing data and stayed on guard against ugly surprises from other big events on the horizon.
The Dow Jones Industrial Average was recently off 16 points, or 0.2%, at 8322. The benchmark was weighed down by a drop of 8.8% in shares of component Boeing, which said the first flight of its 787 Dreamliner aircraft had been postponed. Bank of America and J.P. Morgan Chase rebounded after financial stocks sold off in the previous session.
![[Markets Data]](http://s.wsj.net/public/resources/images/MDGpromo_D01222009151210.jpg)
The S&P 500 was flat, while the Nasdaq Composite Index was off 0.2%. The Russell 2000 was down 0.5%.
The market is coming off its worst single-day decline in two months, underscoring investors' increasing skepticism that the spring's sharp rally can resume while the global economy is still stuck in a stubborn recession.
"Frankly, I'm surprised the rally got this far," considering the lingering effects of last fall's credit crisis, said Brett Hammond, chief investment strategist at TIAA-CREF in New York. "Borrowing is still chilly, if not exactly frozen."
The National Association of Realtors said sales of existing homes rose 2.4% in May compared to the previous month. The inventory of unsold homes declined 3.5%. But the increase in sales came up short of economists' expectations, and the report showed that the average sale price of existing homes fell 16.8% from a year earlier, the third largest drop on record.
Some investors, however, shrugged off the housing data as a harbinger of things to come for stocks.
Ken Safian, president of Safian Investment Research in New York, said he remains confident that retail investors will add to their portfolios in the months ahead a little bit at a time, attracted by marked-down valuations even if they continue to avoid big-ticket purchases including new homes.
Investors are also looking ahead to the Treasury Department's auction of $60 billion in two-year notes slated for Tuesday afternoon, as well as the outcome of the two-day Federal Reserve policy meeting. The central bank is expected to leave interest rates unchanged but traders will be looking for signs that the Fed is planning to roll back some of its steps to stimulate the economy and markets.
Treasury prices were up in late-morning action Tuesday. The two-year note was at 0/32 to yield 1.137%. The 10-year note climbed 9/32 to yield 3.652%.
Overseas, Asian stocks fell sharply while Europe stocks were slightly lower. The Nikkei 225 finished 2.8% lower in Tokyo and Australia's S&P/ASX 200 fell 3.1%. The FTSE 100 dipped 0.2%.
Oil futures fell 47 cents to $67.03 a barrel and the dollar fell against the yen and the euro.
Speed Demons at the Fed
Some price signals were already flashing yellow in 2003.
Editor's note: The following editorial ran on Dec. 9, 2003, under the headline "Speed Demons at the Fed." The editorial was criticized the same day in remarks by Ben Bernanke, who was then a Federal Reserve Governor, at a meeting of the Fed's Open Market Committee. Mr. Bernanke's comments, which were recently released by the Fed, and a related editorial appear nearby.
If Federal Reserve Board members were Nascar drivers, their motto might be, "Look, Ma, no hands." The economy has begun to speed along, and some key price signals are raising the yellow flag, but the Federal Open Market Committee, which meets today, refuses to put its hands on the steering wheel, much less its foot on the monetary brake.
The governors have leaked that they aren't likely to tighten what may be the most accommodative monetary policy since Arthur Burns roamed Fed hallways in the 1970s. The fed-funds rate will apparently remain at 1% "for a considerable period," as the Fed language of recent months puts it. Certainly no one can accuse Chairman Alan Greenspan of stealing the economic punch bowl.
The concern we and others have is precisely the opposite -- whether the Fed is paying adequate attention to those yellow-flashing price signals. Gold closed above $406 yesterday and commodity prices in general are up nearly 30% this year. The dollar is weak across the board and continues to hit new lows against the euro almost daily. Dollar weakness in turn induced OPEC last week to float the prospect of raising the price of oil, which trades in dollars and is already around $31 a barrel.
OPEC's chatter gave those of us who remember the 1970s a jolt, because the cartel first came to global prominence after Richard Nixon broke free from the Bretton Woods monetary system and the world embarked on its last great inflation. Rising oil prices then were a result of dollar inflation, not its cause.
We're willing to stipulate that Mr. Greenspan wants no return to the 1970s. After Paul Volcker, no one has done more over the years to reduce inflation expectations to their recent low ebb than the current Fed Chairman. Core inflation also remains low, though it has climbed about one percentage point this year and the consumer-price index is always a lagging indicator.
We get worried, however, when Fed Governors begin to say that their days of fighting inflation are over. Fed Vice Chairman Roger Ferguson has been declaring the monetary equivalent of "mission accomplished" wherever he goes, most recently in a November 21 Chicago speech. "Inflation still seems more likely to move lower than to increase," Mr. Ferguson averred, making us wonder what prices he has been watching.
Perhaps none. Mr. Ferguson and Fed Governor Ben Bernanke seem preoccupied instead with productivity growth and what they call "the output gap." The former has been growing rapidly -- if you believe we really know how to measure such things -- and the Fed argument is that rapidly rising productivity allows for easier monetary policy for a longer period. If these productivity gains continue once companies begin to hire more workers, then perhaps this will be a correct judgment. But that's a long way from certain.
As for the "output gap," this refers to the difference between actual GDP growth and the level of "potential output." Well, third-quarter growth of 8.2% isn't chopped liver, and most every forecaster now expects 4% in the current quarter extending into next year. Fiscal policy in the form of the Bush tax cuts is also helping to spur growth, and will continue to do so next year, contrary to Democratic-Keynesian predictions that it would be a one-time boost last summer.
In any event, the Fed's main obligation is maintaining stable prices. That means paying attention to what have historically been the best indicators of future inflation -- such as a rising price of gold and commodities, and a falling dollar. The greenback warrants special Fed attention because the world clearly believes that the Bush Treasury (its protestations aside) prefers a cheaper currency.
Traders are betting on that prospect every day, and the danger is that a falling dollar becomes a rapid self-fulfilling prophecy. A run on the dollar could require the Fed to lift rates abruptly and stop the current recovery in its tracks. Short of a crisis, a resurgence of inflation even to 3% or 4% could lead to higher interest rates next year and beyond and slow growth into 2005 and 2006.
A sign from the Fed today that it is mindful once again of inflationary risks would reassure investors that the speed demons at least have their hands on the wheel.
A Doctor's Reflections on Health-Care Reform
Physician payments can't be cut further. Ending frivolous lawsuits is a must.
MARK SKLAR
Dear President Barack Obama and Members of Congress:
I understand that you have undertaken the Herculean task of repairing the health-care system in the United States. As a physician who has practiced medicine for the past 19 years, I think you would benefit from hearing about my experience. I am a board-certified internist with a specialty in endocrinology who currently practices in Washington, D.C. I also provide primary care to many of my patients.
There has been much concern about the rapidly rising cost of health care. I am convinced that costs have increased for a few reasons. First, there are simply more patients in the system. The baby-boom generation has gotten older and now requires care for chronic medical problems. Second, we have unparalleled levels of obesity in our country. This has led to a massive increase in diabetes, hypertension and other chronic problems.
![[Commentary]](http://s.wsj.net/public/resources/images/ED-AJ719_sklar_D_20090622171615.jpg)
Martin Kozlowski If we could prevent even a small percentage of people from becoming obese and developing these conditions, the costs of health care could go down far enough to cover everyone's insurance. To that end, we need incentive programs to encourage healthy eating and exercise. Vending machines and fast food should be banned from our schools. Children should be provided with meals that are low in saturated fat, refined carbohydrates, and sugar.
Another major issue is reimbursement. You may find this hard to believe, but when I first started practicing medicine in 1990 I received more payment for an office visit than I am currently receiving. This has occurred despite the increasing cost of practicing medicine, which is the result of rising malpractice premiums, rents, staff salaries, professional membership fees, license fees, and costs needed to comply with various new regulations. What other profession has experienced a reduction in reimbursement over the last 20 years?
I feel strongly that if doctors are reimbursed more for office visits, they will spend more time with patients. This will lead to fewer referrals by primary-care physicians and result in lower health-care expenditures. Currently, harried primary-care physicians don't have the time to delve into medical problems with a hint of complexity. So patients who could be dealt with if more time was available are referred to specialists or expensive radiology studies.
I have heard that physicians may be mandated to participate in a government-run health plan. I sincerely hope that this is not true. First of all, it sounds unconstitutional. As free individuals and citizens of this country, physicians should not be forced to participate in any plan. We have paid for our professional training and worked hard to distinguish ourselves. We owe no debt to the government. If you want physicians to participate in your plan, give them the right incentives and they will flock toward your program.
Electronic medical records have been praised as a way to save money and avoid duplication of tests. It's true that electronic medical records will save some money, but not as much as you probably are counting on. In my practice, if a patient tells us he had a test performed, we call the physician or medical facility to retrieve the results. But a standardized electronic platform will likely be useful for physicians and should lead to better care.
Contrary to what you may have heard, my experience is that smaller practices provide better patient care than larger practices. There are no economies of scale in medicine. If you hire more physicians, you need to hire more support staff to deal with the increased work demands. Larger practices with less support per physician often end up providing worse service. They also require office managers, and sometimes even managers of managers, all of which just bloat costs.
I worked in a university multispecialty practice for seven years before establishing my own private practice. At the university practice, I found that patients' requests often went unfulfilled. Phone messages didn't get to me, and charts and laboratory tests were routinely lost. In my own practice, my fingers are continuously on the pulse of my staff and patients. Because I can overhear how staff interact with patients, I can intervene rapidly if patients are not getting good service. We routinely have patients transferring to us from larger multispecialty practices where they often wait for hours to be seen, aren't called with their test results, and their phone calls are ignored.
The idea that multispecialty practices lead to better referral patterns is erroneous. If I need to refer a patient to a physician in another specialty, I choose the best physician I know to meet that patient's needs. When making the referral, I consider the physician's clinical competence and the potential chemistry between that physician and the patient. I am not constrained by a limited choice of referral options dictated by a multispecialty group.
When I refer a patient, I fax or mail over pertinent notes, lab work and radiology results so that the specialist knows the patient's problem and doesn't need to perform additional unnecessary tests. The specialists that I refer to either call me or write comprehensive consultation letters so that I am aware of their treatment plan and can coordinate future care with them.
I have also heard that Medicare will be looking to recoup money by increasing oversight of fraud. My fear is that fraud will be poorly defined and a simple miscoding of an office visit will be misconstrued as fraud.
The current coding system is extremely complex and requires documentation that physicians often do not have time for. We try to code fairly but our focus is on treating patients, not mentally calculating all the elements necessary to arrive at a billing code under the current system. Even if we attempted to do everything correctly, an auditing contractor could probably find some fault with our coding, thus exposing us to unfair fines and other serious penalties. It is in the auditor's best interest to discover mistakes since it justifies his investigation, and these organizations are paid a percentage of the funds they recoup. This is a blatant conflict of interest that results in the harassment of dedicated physicians.
The government's focus should instead be limited to unscrupulous individuals and companies that are billing for services never rendered. If miscoding is a persistent problem, the algorithms for arriving at billing codes should be changed.
Finally, work needs to be done to correct the malpractice situation in our country. Physicians have been living under the threat of medical malpractice lawsuits for too long. The escalating cost of insurance premiums has driven many physicians out of practice in critical fields like obstetrics and gynecology. And the threat of malpractice litigation leads doctors to order tests that may not be critical to patients' care, resulting in billions of dollars in needless expenditures
Although I am in favor of universal access to health care, I think that we all need to be honest that universal coverage will be a very expensive program. We cannot cut reimbursement to physicians since levels are already too low. And implementing widespread use of electronic medical records and eliminating fraudulent billing will only lead to marginal savings.
I believe that in order to reduce costs, we must give the public incentives for preventing chronic disease, increase the reimbursement for office visits, and implement medical malpractice tort reform. With these changes, I am certain that we can provide more adequate insurance coverage for all.
Dr. Sklar, an endocrinologist in Washington, D.C., is an assistant professor of medicine at Georgetown University Hospital and George Washington University Hospital.
Religion of Peace
In Iran, a theological state is challenged on theological grounds.
It isn't always that the words Allahu Akbar sound this sweet to Western ears.
It's a muggy Friday afternoon and I'm standing curbside right outside Iran's Permanent Mission to the U.N. in New York City. Preaching in Farsi is a turbaned Shiite imam named Mohsen Kadivar. Hours earlier, in Tehran, Supreme Leader Ali Khamenei had delivered a bullying sermon at Tehran University, warning the opposition that they would be "responsible for bloodshed and chaos" if they continued to march. Mr. Kadivar's sermon -- punctuated by the Allahu Akbars of 20 or so kneeling worshippers -- is intended as a direct riposte. Allahu Akbar has also become the rallying cry of the demonstrators in Iran.
Mr. Kadivar, 50, is a well-known quantity in Iran. As a young engineering student he was arrested by the Shah's police for agitating against the regime. He later became a seminarian in Qom, where he studied under the increasingly liberal-leaning Grand Ayatollah Hossein-Ali Montazeri. Like his teacher, who had once been the Ayatollah Khomeini's designated successor, Mr. Kadivar ran afoul of the regime. In 1999, he was arrested a second time and jailed for 18 months. He credits Mir Hossein Mousavi -- then a university faculty colleague of his -- for helping to spring him free. He's now teaching at Duke.
![[Commentary]](http://s.wsj.net/public/resources/images/ED-AJ711_glovie_D_20090622134326.jpg)
Iranian reformist clergyman Mohsen Kadivar.
Mr. Kadivar's chief claim to fame rests on a three-part work of political philosophy titled "The Theories of the State in Shiite Jurisprudence." At heart, it is a devastating theological critique of the Ayatollah Khomeini's notion of "the rule of the jurist" (Velayat e Faqih), which serves as the rationale for the near-dictatorial powers enjoyed by the Supreme Leader.
"The principle of Velayat e-Faqih is neither intuitively obvious nor rationally necessary," Mr. Kadivar wrote. "It is neither a requirement of religion nor a necessity for denomination. It is neither a part of Shiite general principles nor a component of detailed observances. It is, by near consensus of the Shiite Ulama, nothing more than a jurisprudential minor hypothesis."
Or, as Mr. Kadivar simplified it for me in an interview in the back of his van, "There are two interpretations of Islam. The aggressive Islam of Ahmadinejad, or the mercy Islam of Mousavi."
Why is this significant? Take a look at the color Mr. Mousavi's supporters have chosen for their movement: Green is the color of Islam, meaning the demonstrators are taking on the regime on its own terms. Part of that challenge is to Iran's republican pretensions, mocked by voter turnout that the regime itself admits exceeded 100% in some 50 districts.
Those pretensions were mostly a farce to begin with, given the nature of a system rigged to produce an "Islamic" result. But they also served as a thin edge of the wedge, creating the opening through which a theocratic state can be challenged on theological grounds. In so doing, they exposed what might be described as the twin paradoxes of the Islamic Revolution.
The first is that any revolution carried out in the name of God is also susceptible to being challenged in the name of God -- and God has many names. As with the Communist revolutions of the 20th century, which were ultimately answerable to the verdict of History in which they placed so much stock, the ideological foundation of the Islamic Revolution rests with the prevailing views of a Shiite clerisy. Thanks to people like Mr. Kadivar, those views now tilt increasingly against the regime: So far, he notes, two of Iran's four major seminaries have refused to endorse Mahmoud Ahmadinejad's "victory."
The second paradox involves the nature of revolution itself. All political revolutions involve liberation, at least from whatever came before. But liberation is not a synonym for liberty and is often antithetical to it. In 1979, Iran was "liberated" from the Shah's oppressive rule, but it did not gain any measure of liberty. Thirty years on, what the demonstrators in Tehran's streets seek is to join the liberationist impulses of the regime's founding with the liberal aspirations of the revolution's children.
Whether they'll succeed will depend partly on their willingness to continue their protests -- possibly through crippling work stoppages -- but mostly on the willingness of the regime to enforce its will. Mr. Kadivar is convinced a large segment of the regime's all-important Revolutionary Guards side with the demonstrators. But they have their own perquisites to look after, and liberal revolutionaries are often crippled by their own innate distaste of violence.
Which makes it all the more essential that a regime that has lost its legitimacy in the eyes of its people not recover it through international recognition. Mr. Kadivar praises President Obama's "no meddling" stance so far, but insists the president not recognize Mr. Ahmadinejad's government once its second term officially begins in August. He shouldn't hold his breath. As for the green revolutionaries, they will soon find out what consolation, or strength, they draw from knowing God is on their side, with or without America.
Monday, June 22, 2009
The EU's 'Nationalization by Regulation'
Europe's approach to regulation is really stealthy nationalization.
RONALD A. CASS | FROM TODAY'S WALL STREET JOURNAL EUROPE.
Say what you will about President Obama's effective nationalization of General Motors, Chrysler, and AIG, at least his industrial policy is more open than the European Union's. While Washington is taking over failing companies by pouring billions of taxpayer dollars into them, Brussels -- pushed by competing businesses -- is slowly but surely nationalizing successful companies merely by regulating them.
The latest example of this "stealth nationalization" comes courtesy of the European Commission's long-running feud with Microsoft over Internet browser software. Competitors like Mozilla Firefox and Opera have long complained that Microsoft's ability to pre-load its own Internet Explorer as part of the Windows operating system gave Explorer an unfair advantage.
With regulatory proceedings on these charges still pending before the European Commission, Microsoft announced earlier this month it would release its new version of Windows in Europe without a browser.
A browserless Windows once was the Nirvana of Microsoft foes. But instead of throwing a party, competing browser makers now demand that Microsoft redesign its operating system in yet another way. They want a "ballot screen" that requires consumers to select from a set of browsers -- their browsers -- when a new computer first boots up. In other words, they are urging the EU to impose its judgment on the fundamental design of Windows itself.
If the EU accedes to this demand and forces Microsoft to redesign Windows yet again, it will be entering into truly novel -- and dangerous -- territory.
Brussels bases its thinking in this case on the competition-law concept of "contractual tying," such as a dominant manufacturer telling consumers "if you buy my printer, you also must buy my printer paper." Regulators on both sides of the Atlantic consider this sort of business practice under certain conditions an abuse of dominant market power.
But this model doesn't translate well to something as complex as operating-system design, or more broadly the practice of bundling multiple functions and software programs in a single package. Product design isn't an either-or proposition. It's a multi-faceted task, with every choice presenting different possible paths, and every decision altering the way consumers perceive the product.
The bundling of functions in software and other products is ubiquitous because consumers want bundled products. They prefer a mobile phone, say, that does many things, as opposed to lugging around separate phones, email devices, clocks, calculators, cameras and music players. Many consumers undoubtedly appreciate the convenience that comes from being able to surf the Web on a new computer without having first to sort through competing browsers.
The fact that a leading firm like Microsoft also wants to offer consumers this level of convenience is not a problem needing attention -- especially given recent market developments.
Competing browsers are readily available, easily downloadable, and successful. Mozilla's Firefox accounts for roughly one third of Europe's browser market and together with Opera's browser, Apple's Safari and Google's Chrome takes between 40% and half the European market, according to Applied Technologies Internet of France. That's a big change from the 85%-90% share Microsoft's Internet Explorer commanded five to six years ago.
Once an agency like the EU's competition directorate asserts authority over the features included in a dominant firm's products, there is no easy stopping point short of complete control of all significant business decisions. Once government opens this door, rival businesses (which don't want the leading firm's bundle competing with their products) learn that complaining to government can be a less costly way to gain market share than investing in better products, packaging or marketing.
Microsoft's competitors already have made a cottage industry of complaining to regulators about the design of Windows. In the 1990s, with their market shares declining, competing browser makers asked U.S. competition authorities to make Microsoft remove browsing features from Windows. After failing in the U.S., they renewed their complaint in Europe. In 2004, the Commission sided with software makers for media players to force Microsoft to redesign Windows in ways rivals thought would boost sales of their products. That encouraged more demands from Microsoft foes.
Each time the Commission wades in, it sets a precedent that makes it harder to avoid intervening the next time, and each time it becomes more involved in product design. It's like General Motors and AIG, where the Obama administration is dictating business decisions such as who runs the company and how much they make -- but without any EU investment in the regulated company.
This will be bad for consumers, as the browser case suggests. Governments historically have proven singularly inept at making design decisions, as any number of jokes and real-life stories about Soviet-style economies make clear.
With U.S. competition authorities now leaning toward a more European approach to regulating conduct of dominant firms and competition authorities elsewhere showing greater willingness to protect competitors and impose constraints on leading businesses, Europe's decisions on bundling take on global importance. The EU can lead the way back from the quagmire of government control or lead governments further in.
Anyone who favors increased investment in innovation over investment in lobbying and litigation should hope that the Commission hands product design back to businesses -- to the people whose skills and stakes make it far more likely that consumers, not competitors, will get what they want.
Mr. Cass, chairman of the Center for the Rule of Law and former commissioner and vice chairman of the U.S. International Trade Commission, teaches competition law and intellectual property law in Europe.
Ben Bernanke vs. The Journal on Inflation
Bernanke at the Creation
What the Fed Chairman said at the onset of the credit bubble, and the lesson for today.
The Federal Reserve's Open Market Committee meets today, amid a debate over how and when to remove the flood of liquidity it has poured into the economy in the last 18 months. Fed officials say not to worry, they're as vigilant about inflation as ever -- which is itself a reason to worry. We've all seen this movie before, when the Fed's failure to act in time gave birth to the housing bubble and credit mania that eventually led to panic and today's recession. Will it make the same mistake now?
We remember that 2003 debate because it turns out we played a part in it. The Fed recently released the transcripts of its 2003 FOMC meetings, and what a surprise to find a Journal editorial the subject of an insider rebuttal from none other than Ben Bernanke, then a Fed Governor and now Chairman. We had run an editorial on monetary policy on the same day as the Dec. 9, 2003 FOMC meeting, and Mr. Bernanke clearly didn't take well to our warning about "Speed Demons at the Fed."
We reprint nearby both Mr. Bernanke's comments and our editorial from that day. Readers can judge who got the better of the argument, but far more important is what Mr. Bernanke's reasoning tells us about the Fed today. Our guess is that it won't reassure holders of dollar assets.
* * *
Recall that by the end of 2003 the economy was well into recovery. Third quarter GDP growth had clocked in at 8.2% (later restated to 7.5%), and growth in all of 2004 would be 3.6%. The Bush tax cuts had passed in late May, providing a fiscal boost, and a month later the Fed had cut its fed funds rate to 1% and would hold it there for a year. Yet by December Mr. Bernanke was still giving speeches fretting about "deflation," even as commodity prices were rising and growth was kicking into higher gear. Thus our Dec. 9 warning, the first of many by us and others.
Mr. Bernanke's FOMC remarks that day are especially revealing about how he thinks about monetary policy. In particular, he dismisses any link between commodity price increases and future inflation. He cites a study by a Fed economist claiming to find little connection between "materials" prices and overall inflation. Yet the price of oil was already rising sharply at the time, and it would keep rising as the Fed maintained negative real interest rates for many more months. This was a bad mistake.
Rising gas and food prices didn't show up in the Fed's "core" inflation measurements, but they sure did wallop U.S. consumers this decade. It's one reason Americans never felt great about the expansion. The soaring price of oil also contributed to the housing bubble by transferring wealth from U.S. consumers to oil exporters such as the Gulf States and Russia, which in turn recycled those petrodollars into U.S. Treasurys and mortgage-backed securities. By ignoring commodity prices, the Fed fueled the housing boom.
It's also striking how dismissive Mr. Bernanke is of the declining dollar. We'd have thought the greenback's value would be the Fed's paramount concern, given its mandate to keep prices stable. Yet Mr. Bernanke declared that "large movements of the dollar against major currencies tend to translate into smaller movements against the U.S. trade-weighted basket of currencies and into still smaller effects on import prices because of imperfect pass-throughs." Translation: Exchange-rate fluctuations aren't the Fed's problem, no matter how disruptive their effect on trade and capital flows.
Instead of following these actual prices, Mr. Bernanke's main monetary policy guide is something called "the output gap." This is the difference between actual GDP growth and the level of "potential output," or how fast the economy can grow when it's at full capacity. The problem with this guide is that it relies heavily on labor costs and the jobless rate. And because job creation tends to lag economic recovery, these signals tend to flash yellow long after price pressures or asset bubbles have begun to build.
All of this is relevant today because there is no evidence that Mr. Bernanke and his Fed colleagues have changed their thinking. They still ignore a falling dollar and rising commodity prices, even as oil has climbed to $70 a barrel from $40 six months ago. They also continue to be slaves to the output gap, which means they are unlikely even to begin to tighten as long as the jobless rate remains high. With that rate now at 9.4% and likely to rise, the monetary spigots will probably remain wide open for a long time to come.
We think the Fed made the right call last fall when it eased dramatically in the heat of the panic. The financial shock had caused a decline in the velocity of money, and the Fed needed to boost the supply of money to prevent a genuine deflation. The recession this time is far deeper than in 2001-2002, so there is also a case to be made for erring on the side of being slower to tighten.
But this time the Fed has also gone to greater easing lengths than it ever has, taking short-rates nearly to zero and making direct purchases of mortgage securities and even Treasuries. These are extraordinary acts that push the Fed deeply into fiscal policy, credit allocation and directly monetizing Treasury debt. Combined with the 2003-2005 mistake, they have also raised grave doubts about the Fed's credibility and independence.
* * *
Mr. Bernanke will need political courage that we haven't seen since Paul Volcker was Chairman in order to exit from all of these efforts in time to prevent another bubble or broader inflation. It also wouldn't hurt if the Fed chief looks back with some humility on his intellectual certainty, circa 2003, and analyzes why he was so wrong.
The Incredible Bread Machine Movie
Released in 1975 by World Research, Inc. Inculdes Murray Rothbard, Milton Friendman, ….
To visit Michael Shanklin’s Youtube Channel Please Click Here
PLEASE VOTE UP! IT ONLY TAKES 5 SECONDS AND YOU CAN GIVE 3 VOTES AT ONCE!
Ron Paul Taking Heat for No Vote on Iranian Resolution
June 21st, 2009A clear message from a clear thinker on the subject of liberty!
The House of Representatives voted to condemn the Iranian government and the recent actions in the country with a 405-1 vote. The sole no vote came from Congressman Ron Paul, and already he is getting flack for his vote. People have claimed that since he is such a big proponent for freedom and liberty, then he should have supported this resolution.
Posted on the website Libertarian Republican, the guest columnist writes:
Well once again Congressman Ron Paul shows how much he just loves liberty, he just voted against a house resolution that would declare official support for anti-government protests in Iran!
*takes in air* Ahhhh yes, LIBERTY! Don’t you just love it? Now, to be more serious, how come every non-interventionist paleolibertarian like Paul is always willing to say and write things for freedom (well except this time of course), but they are so resistant to doing something for freedom?
First off, I would agree that we need to express our support of the anti-government protests in Iran, but I am one of those that stands by Ron Paul for his no vote. Ron Paul didn’t vote no, because he doesn’t agree with the protests. As usual he voted no because he rails against Congress for wasting time voting on matters like this that hold no legal weight, but rather they should be focusing on issues that can make an actual difference.
Here is his statement:
I rise in reluctant opposition to H Res 560, which condemns the Iranian government for its recent actions during the unrest in that country. While I never condone violence, much less the violence that governments are only too willing to mete out to their own citizens, I am always very cautious about “condemning” the actions of governments overseas. As an elected member of the United States House of Representatives, I have always questioned our constitutional authority to sit in judgment of the actions of foreign governments of which we are not representatives. I have always hesitated when my colleagues rush to pronounce final judgment on events thousands of miles away about which we know very little. And we know very little beyond limited press reports about what is happening in Iran.
Of course I do not support attempts by foreign governments to suppress the democratic aspirations of their people, but when is the last time we condemned Saudi Arabia or Egypt or the many other countries where unlike in Iran there is no opportunity to exercise any substantial vote on political leadership? It seems our criticism is selective and applied when there are political points to be made. I have admired President Obama’s cautious approach to the situation in Iran and I would have preferred that we in the House had acted similarly.
I adhere to the foreign policy of our Founders, who advised that we not interfere in the internal affairs of countries overseas. I believe that is the best policy for the United States, for our national security and for our prosperity. I urge my colleagues to reject this and all similar meddling resolutions.
The Congress participates in these time wasters all the time. I remember they passed a resolution one time congratulating Ichiro Suzuki on the most hits in a season. This was a waste of time, and held no legal effect. This is why Ron Paul votes against these types of measures. The Congress needs to fix the issues that plague this country instead of passing no binding resolutions.
However, they can speak on T.V. and to the people of Iran and tell them that they are supporting them in their efforts for freedom. That is all it takes, not a resolution by the House.
Why honesty is the best fiscal policy
By Martin Wolf
Abraham Lincoln famously said that “you can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time”. His successor, George W. Bush, is reported to have added: “You can fool some of the people all the time, and those are the ones you want to concentrate on.” Some British politicians wish to follow that advice in the debate on the public finances. Alistair Darling’s refusal to do that was, it appears, the reason Gordon Brown, the prime minister, wanted to drop him. But Mr Darling is to be praised, not dropped, for his probity.
As I have argued in two recent columns (“Tackling Britain’s fiscal debacle”, May 7, and “End Britain’s phoney fiscal war”, June 4), the fiscal position has become a huge medium-term challenge. It is also an obvious symptom of gross policy failure: structural public sector net borrowing is estimated by the Treasury at 9.8 per cent of gross domestic product this financial year.
This horrendous figure is the result of four mistakes: an overestimate of sustainable GDP; slippage in the fiscal position in the years up to the crisis; an exaggeration of sustainable revenue; and a surge in real spending, as a result of unexpectedly low inflation.
Next financial year, as a result, the British government is forecast to spend £4 for every £3 it receives. More precisely, spending is forecast at 48.1 per cent of GDP in 2010-11, up from 40.8 per cent in 2008-09, and current receipts are forecast at 36.2 per cent of GDP, down from 36.9 per cent in 2008-09. By 2013-14, spending is forecast to be down to 43.4 per cent of GDP, while receipts rise to 37.9 per cent. Thus, under Labour’s plans, three quarters of the improvement in the fiscal position would come from a fall in public spending, relative to GDP. Spending is to grow far more slowly than GDP over many years – indeed, under plausible assumptions, for a decade.
So what did my former colleague Ed Balls, now schools minister, mean when he insisted that Labour could afford real increases in spending on schools and hospitals after 2011? His political goal is to open “clear red water” between Labour and Tories. But does his claim also make sense? The answer is: “yes” and “no”.
My colleague, Chris Giles, has worked out what a “yes” answer might mean. Assume the overall spending figures put forward in the Budget, which includes a massive 17 per cent annualised real cut in net public investment between 2010-11 and 2013-14. After the now inevitable increases in debt service and social security spending, real current spending would fall at an annualised rate of 0.7 per cent over these three years. Suppose that spending on health and education were kept level in real terms. Then real current spending on everything else – again, apart from debt interest and social security – must fall at an annual rate of 3.1 per cent a year. Evidently, if spending on health and education were to be increased significantly in real terms, cuts in other areas would have to be savage.
This is why the answer must also be “no”. If re-elected, Labour could increase real spending on health and education but, under its forecasts, other spending would have to be cut fiercely unless it were to run even bigger fiscal deficits than now planned. So cuts in real spending are as inevitable under Labour as under the Conservatives. The only question is where those cuts might fall.
How might Labour escape this trap? One possibility is to campaign against the Treasury’s assumptions. It is certainly possible that Mr Darling is too pessimistic, as his predecessor, Mr Brown, was too optimistic. At this stage, we simply do not know. Yet it would be risky to hope for the best. It would also be embarrassing to reject the forecasts of Labour’s own chancellor.
Another possibility would be to argue for higher taxes. Here the difficulty is that the numbers are so large. Merely to eliminate the reduction in public spending as a share of GDP planned for the three years after 2010-11, receipts must rise by 5 per cent of GDP, or £60bn in current prices, to reach 41 per cent of GDP. This would be equivalent to raising the basic rate of income tax by as much as 12p in the pound.
The great American satirist H.L. Mencken once declared that “nobody ever went broke underestimating the taste of the great American public”. I am more worried by a political version of this cynical view: the idea has grown up among politicians that nobody ever lost an election by underestimating the electorate’s intelligence. But at the heart of the next general election will be hard choices, for whoever wins. A democracy should debate those alternatives openly and honestly.
Unless the economy recovers its lost output, the fiscal position will demand tough spending cuts or huge increases in taxation. Indeed, it will probably require some of both. Mr Darling has recognised that simple reality. So have the Conservatives. But does Mr Brown? He and his colleagues are surely entitled to campaign for higher real spending on health and education. But they also need to say how they plan to pay for it. Anything less is an insult to the electorate’s intelligence.
No comments:
Post a Comment