David R. Henderson  

McArdle Waves the White Flag

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In a post on a serious proposal to almost double the Illinois state income tax, Megan McArdle writes:

The income tax increases, on the other hand, are both workable and necessary. Conservatives will holler, but Illinois is not going to eliminate its entire deficit by cutting spending; the cuts needed too deep, the citizenry dependent on the services. Whether or not you think these programs should exist, they do now, and you can't simply throw people off who planned their lives around them.

It's not just conservatives who would holler: libertarians would probably holler even louder. But think about her reasoning. McArdle is saying, in effect, that if a government program has been in force for many years--people "planned their lives around them"--it should be kept. She explicitly forecloses judging whether these programs should exist--"[w]hether or not you think these programs should exist."

I saw her on John Stossel's show the other night making a cogent case for making most drugs legal. She's probably aware that one of the most effective lobbies for the drug war in California is the prison guard's union. Although it stayed out of the Proposition 19 battle, it was instrumental in defeating an initiative in 2008 to lighten prison sentences for drugs. Certainly many prison guards, as well as "drug court professionals," as the article linked to above puts it, have "planned their lives" around this program. Yet that didn't stop McArdle from advocating a end to the drug war. As well it shouldn't have.

The bigger issue is that with McArdle's decision rule--keep even bad government programs in place if enough people have depended on them long enough--promotes the government ratchet that Robert Higgs talks about. The net effect is a bigger and bigger government. Of course, this is what we already do have, but it's disheartening to see otherwise clear thinkers who are somewhat libertarian say that this is what we should have.


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CATEGORIES: Fiscal Policy



COMMENTS (29 to date)
Randy writes:

Agreed. I see no reason why those who invest in political enterprises should be guaranteed a profit. Bad ideas, political or non-political, should fail, and those who invest in bad ideas should accept their losses and move on.

P writes:

For years now, every time i've read anything that refers to McArdle as a libertarian, i've thrown up in my mouth a little bit.

Bo writes:

McArdle calls for a simpler tax code in a few recent posts. What about the poor H&R Block employees who have planned their lives around the monstrosity that is our current tax code?

I read and enjoy McArdle's blog daily, but I do often find myself wondering why she doesn't follow her thoughts to their logical conclusion.

silvermine writes:

What about people who plan their life or business around a certain tax rate? Or around anything? The government is changing the rules non-stop but no one ever seems to think that changing those rules is unfair. But it is. How many businesses making toys or crafts have gone out of business over the CPSIA?

Maybe it should be illegal for politicians to make laws that spends money outside of the time they've been voted in power. Seriously... if they have a 2, 4, or 6 year term, how do you justify letting them spend money 20 or 30 years in the future??? Its nonsensical.

Blackadder writes:

If Illinois doesn't raise taxes it will have to cut pension benefits for state employees. These benefits are contractual obligations the state bargained for with employees in exchange for services already rendered.

I thought libertarians believed in the sanctity of contract.

David R. Henderson writes:

Dear Blackadder,
I doubt that what you say is true about having to cut pension benefits. For it to be true, it would have to be the case that the pension benefits > current taxes. Are they? Moreover, as I understand the pension benefits, they are for people who remain as state employees. One way to keep the contractual commitment is to keep paying the obligated benefits to those who remain employed but to fire many of them. The benefits, I believe, are contingent: the government pays them if the employees keep their jobs to the pension window.
As for sanctity of contract, I do believe in sanctity of contract between and among private parties. I think sanctity of contract when the government commits to a contract is much more problematic.

Erick Herring writes:

There is a difference between direct effects and side effects. There is also a difference between politically inactive citizens receiving government benefits and sophisticated political organizations, such as unions, spending significant money to bend our political decision-making towards poor policies that produce side effects that benefit them or their members at the direct expense of society as a whole.

The war on drugs example is a good one - it's not a simple case of the government taking money from some and giving it to others. It's a case of perpetuating a web of administrative rules and laws that have many more harmful effects than just enriching the prison guards and the prison guards' union. In that context, I see no major inconsistency in Ms. McArdle's stances on the issues you mentioned.

Like it or not, we have decided as a polity that we will have certain government programs. You can argue against those on their own merits - I've seen you do it. Arguing that we've made a commitment to the citizens that rely on those programs and that our commitment precludes (major) short-term changes seems only sensible and fair.

So, really, you're just objecting in order to be objectionable - to fill up column inches, as it were. Ms. McArdle is a "libertarian" that can have a conversation with (sane) people of other persuasions. Calling her out for such a contrived offense is not useful to spreading your message, in my opinion.

David R. Henderson writes:

@Erick Herring,
Notice that you've actually made an argument against the drug war. But McArdle explicitly rejects the idea of letting an evaluation of a government program affect whether one should advocate getting rid of it, as you can see from the quote.
Moreover, notice how you use the word "we." I have decided none of those things that you claim I was a decision maker in.
As for my motives, I don't appreciate someone who doesn't even know me telling me what my motives are, especially when you get my motives wrong. But since you addressed my motives, my motive, I think, is pretty out in the open: it's to warn against taking something that government does that is hard to fight and going further and saying that it's wrong to fight.
Also, I think your comment fails to address the valid comments made by some of the other commenters above, specifically Bo and silvermine. Raising income tax rates and corporate tax rates to this extent is a major short-term change, the kind you say you wish to exclude.

Floccina writes:

It is also a problem that the short term effects of deregulation are often negative. E.g. people do not think that they need a long term contract with their electric power company neither does the company feel the need to guard their reputation. The long term benefits are good but voters in the short term may call for re-regulation. It is the same with banking. Bankrupt banks are needed to keep bankers in line and we just had some, now is no time to increase bank regulation.

Kevin writes:

@Blackladder I don't know about Illinois specifically but the government pensions I know about aren't contractual. They're the result of statutes specifying the treatment of former employees.

Lars P writes:

McArdle isn't saying is that these programs should be permanented because people depend on them, just that they need to be phased out in a reasonable time frame so people can make adjustments.

I'm as radical a libertarian as any, but that makes perfect sense to me.

Hyena writes:

States have ease of exit, people can move out if they don't like how Enormous HOA #21 runs its neighborhood.

I did that with EHOA #46.

Dan writes:

Promises offered today should be paid for today. If the state wants to give pensions to current employees, they should be paid for today. (If you do this with "funding assumptions," you aren't paying for it today.)

Jacob Oost writes:

My attitude is similar to McArdle's. Although rather than saying "keep programs," I'd say "phase them out, so that people who are too long-lived to rearrange their lives will not be thrown out onto the street, but so that younger people will realize they cannot expect the same entitlements that the elderly get."

Don't just shut down government-ran retirement homes and wheel the old folks out onto the street, but make sure that working people today will not get that same benefit. Make a cutoff point somewhere. If you have the stagger the benefit cutoff points, so be it. The exact particulars of various programs would have to be worked out, but I think it's doable and it's much easier to sell to voters. "They're throwing people out into the street!" is the usual argument against privatizing the welfare state. But if you aren't actually doing that, it changes the debate.

That said, there is no perfect solution. There is no ideal road map to dismantle a welfare state.

Peter H writes:

I agree with Lars (and Lars' interpretation of McArdle),

As a libertarian, I am opposed to Social Security in its current form (but I might be persuaded to a more limited/means tested old age pension or annuity program).

This does not mean I think that stopping the presses on social security checks tomorrow is a good idea. People have reasonably come to depend on those benefits, and we have in fact promised those benefits. What I would do is pay out benefits based on current promises, but not allow new obligations to accrue. So if you're 40 and your social security statement says you'll get $800/month after you retire at 66, I would honour that promise. I would not however continue to collect payroll taxes and allow that promise to accrue to $1800/month at retirement.

Mark Brady writes:

Students For Liberty have invited Megan McArdle as a keynote speaker to their international conference next month. I trust attendees will engage her on this and other issues.

Ak Mike writes:

I take it McArdle was also against the Clinton-era welfare reform.

Michael Keenan writes:

That seems an uncharitable interpretation of McArdle's position. You can stop a program that people have planned their lives around if you give people enough warning. In the case of retirement benefits, for example, you might need decades of warning. She is only saying that the programs shouldn't be eliminated in the short timeframe that would be needed to fix the deficit without tax increases.

Seth writes:

I've been perplexed with McArdle's desire to raise tax rates. I didn't know about Higg's government ratchet -- thanks -- but that is exactly what I imagined while reading her posts.

Even if we believe raising tax rates would result in more revenue -- which I'm not sure I do -- it seems to legitimize the size of government.

Andy writes:

State pensions in Illinois are written into the state constitution. Consider that.

Next consider this:

Illinois has a total budget of $26 billion and a shortfall of $13 billion. In other words to meets its obligations the state would need to double revenue.

and

There’s a desperate problem on the expense side, too. Half of Illinois’s budget is devoted to healthcare and pensions. Not only are these two items the largest budget items, they’re also growing the fastest, expected to increase by 10% year-over-year for the foreseeable future. It can’t constitutionally reduce pensions. Suggesting that Illinois amend its constitution to allow it to cut pensions is dreaming: both houses of the Illinois legislature are dominated by Democrats and public employees are among their core constituencies.
Philo writes:

David R. Henderson writes: "I think sanctity of contract when the government commits to a contract is much more problematic." I share that attitude. The extent to which a present-day legislature can morally or legally bind a future legislature, which may consist of entirely different legislators facing unforeseen circumstances, is far from clear. Laws or regulations that have been passed are often repealed, though many people's plans were formed in reliance on the old laws/regulations--in the expectation, and perhaps the hope, that they would be continued. This, *per se*, does not usually occasion negative comment.

Megan McArdle's argument is obviously very weak. Silvermine nails it.

David R. Henderson writes:

Andy writes:
"Illinois has a total budget of $26 billion and a shortfall of $13 billion. In other words to meets its obligations the state would need to double revenue."
Andy, that's a misuse of language. The correct statement is that to spend $26 billion, the government needs to double revenue. Not all of the $26 billion in government spending is obligated even if one accepts that the state government has an obligation to pay pensions.

Erick Herring writes:

David,

I was wrong to attribute a motive to you in the last paragraph of my comment. You are correct in your response to me and I apologize.

To your other points: I am against the drug war, as I think anyone who advocates limiting the government mandate should be. The point I was trying to make is that Ms. McArdle seems to me to be discussing what can be done immediately versus what can/should be done as a matter of principle.

I don't believe that she "explicitly rejects the idea of letting an evaluation of a government program affect whether one should advocate getting rid of it" - I think she is saying, quite reasonably, that certain programs can, as a matter of practicality, be cut right now.

From what I know of her, solely through her writings, I imagine she still would advocate cutting them in the medium/long term - just as most (reasonable, IMO) people advocate the phasing-in of means testing of various benefits and outright elimination of various subsidies or programs that no longer make (or never made) sense.

In short, I think of myself as agreeing with you and the other Econlog'ers almost all of the time. Which is why I found this post of yours jarring. It is simply not realistic to cut many programs now.

That doesn't mean we shouldn't be trying to cut them in the fullness of time, it just means that we have to operate in the now while we try to make the "perfect" future. In my opinion, and as near as I can tell in Ms. McArdle's opinion, that means tax hikes now. I hope it also means cuts in benefits and programs later, but I live in California, so I'm not hopeful.

As to the comments of @Bo and @Silvermine, I think they are almost entirely beside the point - there is a big difference between relying on a given tax regime and relying on food stamps.

Having said that, I agree with @Sivermine on the need for mandatory sunsetting of laws - I think that all laws should require an up-or-down vote every so many years and that failing to take such a vote should cause them to disappear from the books.

At the end of all this, we are discussing whether Ms. McArdle is consistent in her arguments. I think that, as much as any of us is, she is. As I read he arguments, she consistently advocates for what is possible and fair (by my definition, admittedly). She ignores what is impossible, which seems to infuriate certain commenters here.

I have no beef with pursuing the "impossible" given an appropriate time horizon. Get rid of Social Security? Fine. It's not going to happen tomorrow, but we can phase in changes such that it's gone after a certain date. Get rid of Medicare? Ditto - it's also not going away tomorrow. Same with almost all forms of "welfare" (I put it in quotes because I'm including AFDC, WIC, etc and don't want to enumerate them).

So, I'm happy to have a debate about whether any or all of those should go away* given a reasonable plan and a reasonable time frame. But I think it's nonsensical to pretend it's possible to get rid of them immediately.

If our difference is that you are advocating overarching principles and I am advocating for things that can happen in the real world today, then I understand your points and agree with them.

If, on the other hand, you believe it's practicable to make drastic changes in current programs with immediate effect, then I simply don't agree and there's likely no way to have a fruitful debate.

I don't think it's politically possible to change existing programs without "fair warning" and I think that's also the point Ms. McArdle was trying to make. That doesn't mean I don't wish I had a magic wand - it just means that I am, at long last, more interested in solving problems in the real world than I am in being "right".

* to stave off spurious commentary, I'm not advocating that they should go away - I'm simply saying that it's worth discussing.

Erick Herring writes:

Of course, I made typo in my horribly long comment - third paragraph:

"... certain programs can, as a matter of practicality, be cut right now."

Should be

"... certain programs can't, as a matter of practicality, be cut right now."

Andy writes:

David,

Andy, that's a misuse of language. The correct statement is that to spend $26 billion, the government needs to double revenue. Not all of the $26 billion in government spending is obligated even if one accepts that the state government has an obligation to pay pensions.

Well, those aren't my words, I was simply quoting someone who understands the scope of the budget problem in Illinois and trying to partially answer a couple of your questions above:

I doubt that what you say is true about having to cut pension benefits. For it to be true, it would have to be the case that the pension benefits > current taxes. Are they?

Not by themselves, but once healthcare is added in, it's pretty close.

Moreover, as I understand the pension benefits, they are for people who remain as state employees. One way to keep the contractual commitment is to keep paying the obligated benefits to those who remain employed but to fire many of them. The benefits, I believe, are contingent: the government pays them if the employees keep their jobs to the pension window.

Firing people is probably a necessary step, but won't be nearly enough and those let go will probably be the younger worker with less seniority. The point of highlighting Dave Schuler's comment was that you can't get from here to there with cuts alone, especially since the pensions are protected by the Constitution while, at the same time, growing much faster than inflation.

David R. Henderson writes:

@Erick Herring,
I accept your apology. Thank you.
I'm not sure Megan would agree with your reformulation. It all depends on what she means by "can't." I took her to mean "shouldn't." I think I'm right in my interpretation. Here's why. If she's just referring to what's politically possible, not what's right, would she be as fierce an advocate of increasing taxes if she could be convinced that there was a strong pressure group that would dominate in the political struggle and keep taxes from increasing? If she would still advocate tax increases, then she is talking about what should be, not what can be.

fundamentalist writes:

Exellent points, Dr. Henderson! I'm amazed at how people think the state should always get its money no matter what the circumstances. Most people have the idea that the state owns all of our wealth and only allows us to keep part of it out of generosity.

Keith Eubanks writes:

But will it work? Will raising taxes to close the deficit actually make the people of Illinois better off?

The things we produce and exchange define our standard of living. To increase our standard of living requires us to forgo some current consumption so as to be able to increase our means to produce more of the goods and services that define that living standard.

What is the likely impact of raising Illinois taxes going to be on the state's ability to produce goods and services that define its citizens' standard of living?

Well, I for one am not moving there.

Chris W writes:

I think you are partially taking her out of context.

"Whether or not you think these programs should exist, they do now, and you can't simply throw people off who planned their lives around them."

She is saying that for the sake of stability, that in the meantime, the favorable action is increasing tax rates.

Social spending cuts should, and probably will, take place. She seems to view the increase in tax rates as the easier battle (MB>MC), regardless of the perceived ideal social programs and levels of spending in the status quo.

Chris

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