Cafe Hayek

Taxes, Prohibition, and Politics

With April 15 fast approaching, I reflect on taxes.

Did you know that the modern federal income tax in the United States was a chief cause of alcohol prohibition here (from 1920 through 1933)?  In a 1994 paper in the Arizona Law Review Adam Pritchard (now on the law faculty at the University of Michigan) and I found that the income tax did indeed play this pernicious role.

We found also that a genuine silver lining around the dark cloud of the Great Depression was prohibition's repeal.  This repeal had next to nothing to do with prohibition's ineffectiveness and almost everything to do with Uncle Sam's desperation, in the early 1930s, for additional tax revenue.

My and Pritchard's paper is summarized here.

The Sausage Factory

A number of people are glad that Jack Abramoff is headed to jail.  In this unintentionally funny Washington Post story (rr), we discover one such group.  The story opens:

ELTON, La. -- The dizzying downfall of lobbyist Jack Abramoff means more than just another Washington political scandal in this rural outpost of tin-roofed homes and fraying trailers.

It is a measure of vengeance.

Led on by what they say were his false promises of political access, leaders of the Coushatta Tribe of Louisiana, which is based here, paid Abramoff and his partners about $32 million for lobbying and other services -- more than $38,000 for each of their 837 tribal members. By their accounting, they got very little in return.

I first read this story in the print version of the Post where it was a front page story.  That $38,000 figure gave me some pause.  Where does any group of 837 people find $38,000 apiece to pay for lobbying services?  Why would any group be willing to pay someone $32 million for lobbying services?  But the focus of the piece is instead the injustice of those fees:

It was thievery, tribal members said, that echoes the historic losses of Native Americans to European settlers.

"Abramoff and his partner are the contemporary faces of the exploitation of native peoples," said David Sickey, a member of the tribal council. "In the 17th and 18th century, native people were exploited for their land. In 2005, they're being exploited for their wealth."

Pretty poignant, huh?  But where did that money come from to pay Abramoff?  And why did tribal leaders agree to it?  After a discussion of Abramoff's insulting language in emails about tribe members and how the Tribe used to only deal with Democrats until Abramoff came along, we discover that the tribe did get something in return for their investment:

In some instances, the Coushattas got what they paid for: Abramoff was able to help quash a rival tribe's proposed casino, protecting the Coushatta Casino Resort.

Okay, that's something.  Just how valuable was that service?  A partial answer to that question comes about half way through the story and tells us what might have been worth mentioning nearer to the top of the piece:

Revenue from the operation is estimated to be about $300 million a year, and each tribal member is given a quarterly sum from the profits. Tribe finances are not disclosed publicly, but estimates of those checks per member have ranged from $30,000 to $40,000 annually. Members also receive free medical care and education, as well as financial aid to buy a home. Many have used the money for better cars and better homes.

That's $30,000-$40,000 per member.  Does that mean that a family of four would get about $140,000?  The article doesn't say, but it does tell us:

The per capita prosperity has also kicked off a baby boom, tribal leaders said, and today 342 of the tribal members are under the age of 18.

I suspect it isn't the prosperity that's encouraging the baby boom but the incentives implicit in how casino revenues are divided.

Any time the government hands out monopoly rights, it's not surprising that the beneficiaries will pay large sums of money to keep those rights intact and free from competitors.

I sure would like to know how the Coushattas rather than another tribe came to be chosen for the casino in that area.  I have a feeling it wasn't a lucky spin of the roulette wheel or drawing the high card.

The Full History of Racial Segregation in the United States

Thomas Sowell fills out the important history behind Jim Crow legislation – the history that made racial segregation in the U.S. a reality. Here’s the core of Sowell’s explanation:

Those who see government as the solution to social problems may be surprised to learn it was government that created this problem. Many, if not most, municipal transit systems were privately owned in the 19th century and the private owners of these systems had no incentive to segregate the races.

These owners may have been racists themselves but they were in business to make a profit -- and you don't make a profit by alienating a lot of your customers. There was not enough market demand for Jim Crow seating on municipal transit to bring it about.

It was politics that segregated the races because the incentives of the political process are different from the incentives of the economic process. Both blacks and whites spent money to ride the buses but, after the disenfranchisement of black voters in the late 19th and early 20th century, only whites counted in the political process.

Sowell also hits an important nail on the head with this line near the end of his column:

People who decry the fact that businesses are in business "just to make money" seldom understand the implications of what they are saying. You make money by doing what other people want, not what you want.

Although Sowell doesn’t mention them by name, the scholars who supplied the important research on the roots of racial segregation in the United States are Robert Higgs (see this outstanding book) and my former colleague at George Mason University Jennifer Roback-Morse.  (Her two most important papers along these lines – but for which I cannot find links – are Jennifer Roback, "Southern Labor Law in the Jim Crow Era: Exploitative or Competitive?," University of Chicago Law Review, Vol. 51 (1984); and Jennifer Roback, "The Political Economy of Segregation: The Case of Segregated Streetcars," 46 Journal of Economic History, Vol. 46 (1986).)

Can Wal-Mart Pay More?

The New York Times (rr) reports (ht: Drudge) that Wal-Mart is under fire for paying too little.  The headline of the story:

Can't Wal-Mart, a Retail Behemoth, Pay More?

Love that rhetorical question with the easy answer.  Of course it can!  I hesitate to use the word "report" in the opening sentence of this post.  There's no real news story here.  It's not like someone discovered that Wal-Mart is using slave labor or not paying the minimum wage.  That would be a news story.  What we have instead is what I'd call a fake news story, generated by a press release from activists that plays to the sensibilities of a newspapers editors, reporters and readers.  Let's read on:

With most of  Wal-Mart's workers earning less than $19,000 a year, a number of community groups and lawmakers have recently teamed up with labor unions in mounting an intensive campaign aimed at prodding Wal-Mart into paying its 1.3 million employees higher wages.

A new group of Wal-Mart critics ran a full-page advertisement on April 20 contending that the company's low pay had forced tens of thousands of its workers to resort to food stamps and Medicaid, costing taxpayers billions of dollars. On April 26, as part of a campaign called "Love Mom, Not Wal-Mart," five members of Congress joined women's advocates and labor leaders to assail the company for not paying its female employees more.

So do you see the "news" that generates the article?  A group of activists have taken out an ad and started a campaign criticizing Wal-Mart.  Those activists have sent a torrent of press releases to places like the New York Times, hoping to get some free publicity for their cause.   It's working.

Among workers at Wal-Mart's 3,700 stores across the United States, the debate is also heating up.

Not really.  That's a meaningless sentence designed to lull the reader into thinking something is happening that merits New York Times coverage.  The reporter, Steven Greenhouse, has no idea if the debate is heating up, cooling down or not happening at all.  It's a ridiculous claim.  The data that supports it comes from the reporter finding two workers, one fairly satisfied, one fairly dissatisfied, and interviewing them.  Not even an argument in the parking lot that's overheard, but a made-up debate to keep the article going:

Frances Browning, for example, once earned $15 a hour, but now at Wal-Mart, where she is a cashier in Roswell, Ga., she is paid $9.43. She says she is happy to have the job.

"I was unemployed for two and a half years before I found my job at Wal-Mart," Ms. Browning, 57, said. "Like everybody else I'd love to make a lot more, but I have to be realistic."

But Jason Mrkwa, 27, a high school graduate who stocks frozen food at a Wal-Mart in Independence, Kan., maintains that he is underpaid. "I make $8.53, even though every one of my evaluations has been above standard," Mr. Mrkwa (pronounced MARK-wah) said. "You can't really live on this."

You really can, obviously, but we all understand it isn't fun to live on $17,000 a year.  It helps to do it in Independence, Kansas.  It helps to be single, which is apparently, the family structure of Mr. Mrkwa.  The more interesting question is what this has to do with Wal-Mart.  The implication of the article and the claim of the activists is that Mr. Mrkwa's relatively challenging financial life is due to Wal-Wart.  It is not due to Mr. Mrkwa's choices or the quality of the school he attended or the parenting he received.  Those factors are ignored for the obvious reason that Wal-Mart sends him his paycheck.

The rest of the article is a surreal discussion of whether Wal-Mart can afford to pay higher wages or not.

If Wal-Mart spent $3.50 an hour more for wages and benefits of its full-time employees, that would cost the company about $6.5 billion a year. At less than 3 percent of its sales in the United States, critics say, Wal-Mart could absorb these costs by slightly raising its prices or accepting somewhat lower profits.

No doubt they could.  The New York Times could also afford to raise its subscription prices and send the extra money to Wal-Mart workers.  Or they could lower Steven Greenhouse's salary by 5% and send the difference to Mr. Mrkwa. 

That sounds silly, but that's really what the activists want.  They want Wal-Mart to charge higher prices, implicitly taxing Steven Greenhouse and anyone else who shops at Wal-Mart in order to raise the well-being of Wal-Mart workers.  Exam question for economics undergrads: Explore the ramifications of such a policy.   Who wins and who loses?  What businesses will expand and which will contract?  In your answer, please reference Bastiat's insights into the seen and the unseen.

Actually, the Times should raise Steven Greenhouse's salary.  I bet he'd like a better life.  Let's start a foundation to improve salaries at the New York Times.  The paper makes money.  They could afford to make a little less.  And many of the Times reporters live in New York City which is very expensive.  They're underpaid.

The article closes with a fascinating conjecture.  Paying higher wages wouldn't punish Wal-Mart.  It would actually increase profits:

But Burt Flickinger, another retailing consultant, said it would be in Wal-Mart's long-run interest to pay better. "Wal-Mart's turnover will be close to half a million workers this year," he said. "By paying higher wages, Wal-Mart will make its employees happier and will reduce turnover. A lot of its new workers, for instance, don't know where to stock things. Higher wages will mean more productivity per person, and that should help raise profits."

So Burt Flickinger knows more about what's in Wal-Mart's self-interest than Wal-Mart's managers and CEO.  Impressive.  Memo to Burt: you're in the wrong field!  You're wasting your talents—shut down your consulting business and get into retailing! 

This would be funny, but it has the effect on the reader of making the activists even more sympathetic.  Their plan is a free lunch.  Higher pay for Wal-Mart's workers AND more profits.  It's what they call a win-win.

It would be nice if people understood the role of profits in a free society.  Something for all of us to work on.

The Obesity Tsunami

Being fat isn't good for you.  We know that being very fat is very bad for you.  I don't think we know much about being a little bit overweight.  According to a story in yesterday's Washington Post, though, we have begun to quantify just how bad obesity is for our health:

Obesity has started to erode the gains Americans have made in extending their life spans and will stall the long trend toward increasing longevity unless the nation takes aggressive steps to slim down, researchers said yesterday.

 

    

Illnesses caused by obesity are already shortening the average U.S. life by at least four to nine months -- greater than the impact of car accidents, homicides and suicides combined -- a first-of-its-kind analysis has determined.

That's pretty scary.  And there's a nice chart to summarize the findings.  It gives the whole exercise a nice scientific gloss.

Within 50 years, if the trend is not reversed, obesity will cut the average life span by at least two to five years, which would exceed the effects of all cancers, the researchers estimated. That could overtake all gains from healthier lifestyles and medical advances and cause longevity to plateau or perhaps decline, they projected.

Scarier still.

    

"The take-home message is that obesity clearly needs to be considered in an entirely new light -- it is far more dangerous than we ever thought," said S. Jay Olshansky, a University of Illinois demographer who led the study in today's New England Journal of Medicine. Several other researchers agreed, saying the finding that obesity is actually undermining longevity should be a wake-up call.

I'm not so sure, at least based on a summary of the findings that we find on the second page of the article:

If obesity were magically eliminated, the overall life span would be at least one-third to three-quarters of a year longer, they found.

At first glance, that isn't much of a wake-up call.  I'm supposed to cut back on ice cream for 50 years in order to have a few extra months when I'm 80?  Just to make sure I'm sufficiently worried, here come another expert quoted in the article:

"These results are stunning and reinforce the enormous toll that obesity is taking on the health and happiness of the population," said Kelly D. Brownell, who directs the Center on Food Policy and Obesity at Yale University.

Stunning?  Enormous toll?  Happiness of the population?  I wonder if the Center on Food Policy and Obesity at Yale has any vested interest in exaggerating the seriousness of this problem.

 

Other researchers, however, said the underlying assumptions were excessively pessimistic. The study assumed, for example, that everyone who is overweight will suffer health problems.

 

    

Whoa.  The study assumed that "everyone who is overweight will suffer health problems?"  What the reporter should have asked at this point is the definition of overweight.  And the definition of health problems.  And how those problems were used by the researchers to establish shortened life expectancy.  At this point we hear from the only skeptic who is quoted in the article.

    

"I don't think this is based on solid, scientific ground," said Glenn A. Gaesser, a professor of physiology at the University of Virginia who frequently questions the impact of obesity. "It's nonsensical, really."

 

 

    

Notice that he's identified as a professional skeptic.  His evaluation, that it's "nonsensical" is pretty harsh.  But since we don't learn why he feels that way, there's no way of knowing if his skepticism is reasonable.  So let's hear from the other side:

    

But the researchers said their estimates were conservative in several ways, including the fact that they focused exclusively on adults. The true impact is likely to be much greater as obese children age and begin suffering elevated rates of diabetes, heart disease and cancer, they said.

    

"It's sort of like a massive tsunami heading towards the shoreline," said David S. Ludwig, an obesity expert at Harvard Medical School and Children's Hospital in Boston who worked with Olshansky. "It's going to peak in a massive public health crisis."

This is a low point in the history of scientific discourse.  "It's sort of like a massive tsunami"?  Sort of like?  What does that mean?  And it's actually nothing like a massive tsunami.  The essence of a tsunami is that it's a force of nature that comes out of nowhere and gives you no chance to run or hide.  Obesity, to the extent it's a problem, is a problem of our own making and our own choice.  It's not a virus or a tidal wave. It's not a contagious disease.  It's not an epidemic  or plague.  It's something we do to ourselves and if we choose, we can avoid. Some of us can avoid it easier than others.  But it's a crisis of our own making.

When the authors of a study call the problem of obesity a tsunami, I know there's something else going on rather than a quest for scientific truth.  I'll try and get the original study from the New England Journal of Medicine or from one of the authors and see what I can find about the methodology.