National Debt is NOT like Personal Debt

Krugman explains that government debt never has to be repaid and we mostly owe it to ourselves.

Deficit-worriers portray a future in which we’re impoverished by the need to pay back money we’ve been borrowing. They see America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments.

This is, however, a really bad analogy in at least two ways.

First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew...

Second — and this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves.

This was clearly true of the debt incurred to win World War II. Taxpayers were on the hook for a debt that was significantly bigger, as a percentage of G.D.P., than debt today; but that debt was also owned by taxpayers... So the debt didn’t make postwar America poorer. In particular, the debt didn’t prevent the postwar generation from experiencing the biggest rise in incomes and living standards in our nation’s history.

Read the full updated post at Medianism.org

US Socialism In WWII

The military is socialist!  Wars are intrinsically socialist activities and the US reached peak socialism during WWII.  The federal government spent about half of total US spending to fund the war as you can see in the graph below, and the government made many additional regulations and interventions.   

For example, according to the History Channel, in 1944:

...as World War II dragged on, President Franklin D. Roosevelt orders his secretary of war to seize properties belonging to the Montgomery Ward company because the company refused to comply with a labor agreement.
In an effort to avert strikes in critical war-support industries, Roosevelt created the National War Labor Board in 1942. The board negotiated settlements between management and workers to avoid shut-downs in production that might cripple the war effort. During the war, the well-known retailer and manufacturer Montgomery Ward had supplied the Allies with everything from tractors to auto parts to workmen's clothing--items deemed as important to the war effort as bullets and ships. However, Montgomery Ward Chairman Sewell Avery refused to comply with the terms of three different collective bargaining agreements... In April 1944, ...Roosevelt called out the Army National Guard to seize the company's main plant in Chicago. Sewell himself had to be carried out of his office by National Guard troops. By December of that year, Roosevelt was fed up with Sewell's obstinacy and disrespect for the government's authority. (...Sewell's favorite insult was to call someone a "New Dealer"--a direct reference to Roosevelt's Depression-era policies.) On December 27, Roosevelt ordered the secretary of war to seize Montgomery Ward's plants and facilities in New York, Michigan, California, Illinois, Colorado and Oregon.
In his announcement that day, Roosevelt emphasized that the government would "not tolerate any interference with war production in this critical hour." He issued a stern warning to labor unions and industry management alike: "strikes in wartime cannot be condoned, whether they are strikes by workers against their employers or strikes by employers against their Government." Sewell took the fight to federal court, but lost.
For much of the 20th century, Montgomery Ward, ...reigned as one of the country's largest department store and mail-order retail chains.

Average Tax Rates Matter Most For Some Decisions

What is 'marginal' is what is avoidable when you make a decision.  If you decide to work one more hour this year, then the marginal tax rate is what is avoidable.  If you decide what career for the next year, your future average tax rate is what is avoidable.  Garett Jones:

It's often wise to pay more attention to marginal tax rates than to average tax rates.  If you can make your first $100 tax free but the 101st dollar is taxed at a marginal rate of 99% you'll probably decide to earn $100 at most.  

But what is marginal?  When it comes to career choices or the state you'll live in or whether to have an extra child the marginal decision is very big, and a rational person will base that decision mostly on the average long run costs and benefits.  In cases like this, the official marginal tax rate won't matter nearly as much as the long run average tax rate.  

This isn't just a theory: It appears to be true for that most economistic of organizations, the multinational corporation.  When multinationals are deciding which country to invest in, they don't pay that much attention to marginal tax rates.  According to Glenn Hubbard, 

...investment location decisions are more closely related to average rather than marginal tax rates. 

When making the go/no-go decision, corporations care more about their long run tax bill.  That's because the marginal decision is the go/no-go decision.  

...when people are deciding whether to become medical doctors or mere professors, lawyers or struggling novelists, entrepreneurs or Xbox champions, these go/no-go decisions will be shaped by the average tax rate that the rich will have to pay for decades to come. 

...That's just a case of applying Hubbard's idea: the marginal tax rate didn't matter when you chose your career, but the average tax rate--after deductions--mattered enormously.  

In the long run we should worry more about average tax rates. 

Interest group politics and pot

It is always interesting to see how interest groups are lobbying.  It turns out that medical marijuana vendors are lobbying against pot legalization because they prefer to have a special license to sell the stuff and full legalization would result in more competition and lower prices for medical marijuana. The beer lobby is also worried that marijuana will be a substitute and not a compliment for beer.  There is academic research that has demonstrated this.
And casino operators have joined the anti-gambling movement to help fund the political battle against a new casino in Maryland because it would increase competition and lower prices. 
Hat tip Yglesias. 

Optimal Taxation of Externalities Hurt the Poor

Charles Wheelan, Naked Economics, 2010, pp 51-52.

 ...both a gasoline tax and an income tax generate revenue. Yet they create profoundly different incentives. The income tax will discourage some people from working, which is a bad thing. The gasoline tax will discourage some people from driving, which can be a very good thing. Indeed, "green taxes" collect revenue by taxing activities that are detrimental to the environment and "sin taxes" do the same thing for the likes of cigarettes, alcohol, and gambling.In general, economists tend to favor ...a gasoline tax ...[which] also provides an incentive to conserve fuel. Those who drive more pay more. So now we're raising a great deal of revenue with a tiny tax and doing a little something for the environment, too. Many economists would go yet one step further: We should tax the use of all kinds of carbon-based fuels, such as coal, oil, and gasoline. Such a tax would raise revenue from a broad base while creating an incentive to conserve non-renewable resources and curtailing the CO2 emissions that cause global warming.Sadly, this thought process does not lead us to the optimal tax. We have merely swapped one problem for another. A tax on red sports cars would be paid only by the rich. A carbon tax would be paid by rich and poor alike, but it would probably cost the poor a larger fraction of their income. Taxes that fall more heavily on the poor than the rich, so-called regressive taxes, often offend our sense of justice. (Progressive taxes, such as the income tax, fall more heavily on the rich than the poor.) 

Economies of Scale and Illegal Drugs

Real prices for illegal drugs have dropped dramatically since the 1970s due to the same technological forces that have boosted globalization in other industries.  For example, the price of cocaine dropped in half in Europe between 1990 and the early 2000s. But compared with legal pharmaceuticals and agriculture, illegal drug businesses are still incredibly fragmented and inefficient.

Some rare light was shed on the [drug] business by a [British] Home Office study in 2007, in which 222 drug-dealers were interviewed in prison by analysts from Matrix Knowledge Group, a consultancy, and the London School of Economics. ...Most drug businesses are forced to stay small and simple to evade the police. Only one dealer claimed to be part of an organisation of more than 100 people, and a fifth were classified by researchers as sole traders. Fear of being uncovered also hampers recruitment: most dealers stuck to family and friends, and people from the same ethnic group, when hiring associates. Just like other businessmen, they carried out criminal-record background checks on potential employees—except that, in this case, a record was a good thing.
Kevin Marsh, an economist at Matrix Knowledge, argues that most players in the drug business have a poor knowledge of the market. “Shopping around for new wholesale suppliers is risky, so many retailers stick to the same one and pay over the odds,” he says.

Colorado, Washington state, the Netherlands, and a few other places have legalized the possession and use of marijuana, but these experiments only legalized possession and the industrial-scale production and dealing is still illegal.  This is still nothing like what full legalization would look like.  If agribusiness giants like Monsanto began breeding new strains for greater productivity and if tobacco giants like Phillip Morris developed processing and retail giants like Walmart did the distribution, then marijuana would be so cheap, it would be given away for free at some places because it would be cheaper than a packet of free sugar or ketchup at McDonalds.

marijuana is a nonperishable bulk commodity like wheat or lentils. For such commodities, the final price to the end user is dominated by the cost of production.
Try to imagine a world in which you’re allowed to have some tomatoes in your house, you’re allowed to cook tomatoes, you’re not punished for having tomatoes in your possession if the cops stop you, and you’re even allowed to buy tomatoes at specialty tomato stores—but where it’s illegal to actually grow tomatoes. The price of tomatoes is going to escalate enormously. The problem isn’t [just] that the tomatoes will suddenly disappear from supermarket shelves (though they will) but that all the farms will have to shut down. Which isn’t to say that nobody will grow tomatoes. People like tomatoes. So tomatoes will be smuggled in from Mexico. Tomatoes will be grown in backyards. People will use lights and hydroponic rigs to grow tomatoes indoors.

The tomato price would skyrocket because the new tomato production methods would be so much less efficient compared with modern industrial methods for producing and distributing tomatos.

America’s farmlands are some of the most productive in the world, thanks in no small part to technology and the existence of scale sufficient to leverage that technology. Even what Americans think of as a small family farm is quite large compared with an illicit marijuana operation. There are no amber waves of cannabis anywhere in the world today, but under a true legalization regime there would be. And this makes all the difference.

How cheaply could pot be grown with advanced farming techniques? One potential data point is Canada’s industrial hemp industry, where production costs are about $500 per acre. If the kind of [low-grade] commercial weed that accounts for about 80 percent of the U.S. market could be grown that cheaply, it implies costs of about 20 cents per pound... [Better quality] marijuana is grown from more expensive transplanted clones rather than from seeds. Even so, the authors note that “production costs for crops that need to be transplanted, such as cherry tomatoes and asparagus, are generally in the range of $5,000-$20,000 per acre.” That implies costs of less than $20 per pound for [top quality] and less than $5 a pound for mid-grade stuff. Another way of looking at it, suggested by California NORML Director Dale Gieringer, is that we should expect legal pot to cost about the same amount as “other legal herbs such as tea or tobacco,” something perhaps “100 times lower than the current prevailing price of $300 per ounce—or a few cents per joint.”

This would make pot far and away the cheapest intoxicant on the market, absolutely blowing beer and liquor out of the water. Joints would be about as cheap as things that are often treated as free. Splenda packets, for example, cost 2 or 3 cents each when purchased in bulk.

At those prices, pot prices would not only blow alcohol out of the water, a joint would be cheaper to serve than water itself.  A 'free' paper cup of water costs McDonalds more than a few cents.  A pound of pot is enough to make 800 joints and it could be produced for as low as 20 cents.

Irrational Fears Kill Thousands of Americans Annually

Charles Kenny says, "Airport Security Is Killing Us": 

Of the 150,000 murders in the U.S. between 9/11 and the end of 2010, Islamic extremism accounted for fewer than three dozen. Since 2000, the chance that a resident of the U.S. would die in a terrorist attack was one in 3.5 million, according to John Mueller and Mark Stewart of Ohio State and the University of Newcastle, respectively. In fact, extremist Islamic terrorism resulted in just 200 to 400 deaths worldwide outside the war zones of Afghanistan and Iraq—the same number, Mueller noted in a 2011 report (PDF), as die in bathtubs in the U.S. alone each year...
According to one estimate of direct and indirect costs borne by the U.S. as a result of 9/11, the New York Times suggested the attacks themselves caused $55 billion in “toll and physical damage,” while the economic impact was $123 billion. But costs related to increased homeland security and counterterrorism spending, as well as the wars in Iraq and Afghanistan, totaled $3,105 billion. Mueller and Stewart estimate that government spending on homeland security over the 2002-11 period accounted for around $580 billion of that total.
The researchers quote Rand Corp. President James Thomson, who noted most of that expenditure was implemented “with little or no evaluation.” In 2010, the National Academy of Science reported the lack of “any Department of Homeland Security risk analysis capabilities and methods that are yet adequate for supporting [department] decision making.”...
There is lethal collateral damage associated with all this spending on airline security—namely, the inconvenience of air travel is pushing more people onto the roads.... To make flying as dangerous as using a car, a four-plane disaster on the scale of 9/11 would have to occur every month, according to analysis published in the American Scientist. Researchers at Cornell University suggest that people switching from air to road transportation in the aftermath of the 9/11 attacks led to an increase of 242 driving fatalities per month—which means that a lot more people died on the roads as an indirect result of 9/11 than died from being on the planes that terrible day. They ...suggest that enhanced domestic baggage screening alone reduced passenger volume by about 5 percent in the five years after 9/11, and the substitution of driving for flying by those seeking to avoid security hassles over that period resulted in more than 100 road fatalities.

This is part of the logic for why infant car seats are not required on airlines.  If parents were required to lug heavy carseats onto airlines and pay for an extra seat, more parents would drive instead of flying and that would kill more infants than the carseats on airlines would save. Yglesias asks why terrorists don't try to blow up any softer US targets:

If commercial airplanes were no more secure than your average city bus, planes would be blown up as frequently as city buses—which is to say never. I've heard some people postulate that terrorists have a special affection for blowing up planes, but I'm not sure that's right. In the not-too-distant past, Israel had a substantial terrorists-blowing-up-buses problem and had to take countervailing security measures. But unlike Israel, we're not doing anything to secure our buses. It's at least possible that nobody blows up American buses because nobody is trying to blow anything up.