Scott Sumner  

The "cost" of sloppy thinking

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The Atlantic, one of America's more respectable publications, has an article entitled "The Pillaging of America's State Universities". Here's the second paragraph:

According to the American Academy of Arts and Sciences' recently completed Lincoln Project report, between 2008 and 2013 states reduced financial support to top public research universities by close to 30 percent. At the same time, these states increased support of prisons by more than 130 percent. New York City's budget office reported in 2013 that incarcerating a person in a state prison cost the city roughly $168,000 a year. California apparently does it on the cheap: It costs roughly $64,000 annually for each prisoner--a bit more than the cost of a year at an Ivy League university (average tuition is $50,000) and far more than at the University of California, Berkeley, ($13,000) or at CUNY ($8,000).
I had to read this twice, before realizing that it was utter gibberish. We are supposed to be impressed that the numbers for prisons are bigger than for Ivy League schools, which in turn are far bigger than for those poor unsupported state universities. In fact, the numbers show exactly the opposite. Before explaining why, let's review the term 'cost', which has two quite different meanings. Sometimes 'cost' means the opportunity cost of producing something, as when we talk about the cost of building a new highway, or a school. At other times, the term 'cost' is used synonymously with "price" as when we say, "Gas costs only 2 dollars a gallon at the nearby Mobil station."

Cole has mixed these meanings together, all within the same paragraph. The cost of prisons refers to the first meaning, the resources used to incarcerate prisoners. The price is of course zero, as prisoners are generally not charged for room and board. In contrast, Cole uses the 'cost' of a public education to refer to the price. The actual cost or providing the service is far higher, with the difference made up by public subsidies. Thus the lower the number associated with the "cost" of going to Berkeley, the higher the state subsidy. When I read Cole's paragraph, I drew the opposite implication from what Cole intended. I ended up being very surprised at the size of the public subsidy (plus donations from alums), which picks up most of the cost of education at Berkeley and CUNY.

This isn't just a small point; it makes the rest of the article almost total gibberish. What we really need is a graph showing public support for higher education (state and federal combined) as a share of GDP, over a long period of time. Because that graph is not provided, it's impossible for the reader to know whether there has been a significant cutback in public support, or not.

And it gets even worse:

The United States currently has one of the lowest marginal tax rates in the industrial world. Transferred resources from the very rich (less than 1 percent of nation's population controls more than 25 percent of its wealth), corporations, and from lower-priority institutions could build a more robust educational system in our country.
The first sentence is gibberish, as the US has hundreds of marginal tax rates. In context, he seems to be referring to corporate tax rates and the top MTR on income taxes (as he refers to corporations and wealthy individuals.) If so, then the claim is absurd. The US doesn't have the lowest MTR, we have the very highest MTR on corporate income, and an above average top tax rate on personal income if you include state taxes (the Federal top rate is 43.4%, and with state taxes included the top rate is closer to 50%).

The Socialist government in France recently tried a 75% top rate on income, and had to quickly abandon that rate. The US had 90% top rates in the 1950s, but the law was so riddled with loopholes that it collected very little revenue. The 43.4% top rate is more effective in actually collecting revenue. Progressives don't seem to realize that there's actually very little revenue left on the table, as higher rates tend to reduce GDP. That's one of the reasons why GDP in Western Europe is far below US levels. And to the extent that they do collect more revenue, it's almost entirely due to regressive taxes like VAT and gasoline taxes.

Even worse, progressives keep forgetting that the money that they wrongly think they can be extracted from the rich, has already been promised 10 times over. Remember that it was going to be used to prop up Social Security, and even expand benefits? And that it's going to be used to provide universal pre-school for free? And that it's going to be used to repair infrastructure and build high-speed rail? And that it's going to be used to pay reparations to African-Americans? Oh, and how about single-payer health care in a system costing 18% of GDP (the current entire federal budget is about 22% of GDP.) Every time progressives find another "unmet need" they keep designating the exact same pot of gold from the rich for that purpose, a pot of gold that's already been spent many times over, and that (as the French socialists recently learned) is probably not available in the first place.

Oh, and they also want to make income more equal, which would further reduce tax revenue.

Even worse, when progressives actually have to face the opportunity cost of their decisions, they get cold feet. Consider New York City, one of America's wealthiest urban centers, with a tax base that places like Detroit and Cleveland can only envy. They just elected a very progressive mayor, and thus you might expect that "infrastructure" will finally be addressed. Exactly the opposite seems to be true:

Mayor Bill de Blasio has postponed work to finish New York's third water tunnel, a project that for more than half a century has been regarded as essential to the survival of the city if either of the two existing, and now aged, tunnels should fail.

The new tunnel has already been completed and is carrying water into Manhattan and the Bronx. But segments that would supply Brooklyn and Queens, home to five million people, though also virtually finished, still await the building of two deep shafts.

If calamity or age forced the shutdown of City Water Tunnel No. 2, which is 80 years old, the primary water supply to much of Brooklyn and Queens would be lost for at least three months, city engineers said, the time it would take for an emergency activation of the sections of Tunnel No. 3 in Brooklyn and Queens that have already been finished.

The entire Brooklyn-Queens leg of the new tunnel was scheduled to be finished by 2021, with $336 million included in the capital budget in 2013 by Mr. de Blasio's predecessor, Mayor Michael R. Bloomberg, for whom completion of the third tunnel was the most urgent and expensive undertaking of his tenure.

So the infrastructure that we supposedly need is started by a Republican, and abandoned by a progressive. The real "unmet need" is not infrastructure; it's higher pay and fatter pensions for public employees. Even California, which spends "only" $64,000 on each prisoner, hires prison psychiatrists at $400,000/year:

Mohammad Safi, a graduate of a medical school in Afghanistan, began working as a psychiatrist at a California mental hospital in 2006, making $90,682 in his first six months. Last year, he took home $822,302, all of it paid by taxpayers.

Safi benefited from what amounted to a bidding war after a federal court forced the state to improve inmate care. The prisons raised pay to lure psychiatrists, the mental health department followed suit to keep employees, and costs soared. Last year, 16 California psychiatrists, including Safi, made more than $400,000, while only one did in the other 11 most populous states, according to data compiled by Bloomberg.

After life in Afghanistan, Safi must be pinching himself to make sure he's not dreaming.

And now imagine what the public employees make in the New York system, where it costs $168,000 per prisoner. That's about $500/day. I'm tempted to make a joke about the "cost" of a room at the Four Seasons in Bali, or Phuket, but I'd better stop before I end up becoming the sort of demagogue that I normally despise.

HT: Lorne Smith

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COMMENTS (14 to date)
ThaomasH writes:

There seems to be something missing in the anecdote about postponement of the water project in NYC. Scott seems to relate it to employee pay. Did city employee pay change in such a way as to make the NPV of the water project negative (when it had been positive under Bloomberg?) Or does NYC face an absolute borrowing constraint so that the water project has to be paid for out of current revenues; ie that a dollar of employee cost is a dollar less of of investment in the water project?

And how is this related to mixing up the cost of incarcerating a prisoner with the part of the cost of a college education paid by tuition?

And what is wrong with comparing the cost of incarcerating a prisoner with a hotel room; there, presumably the cost of the room does cover the full cost of providing the service as does the average cost of incarceration. (Or is the point that prison employees are paid above their opportunity cost in other occupations and so part of the cost is just economic rent?)

Scott Sumner writes:

Thaomas, You asked:

"And how is this related to mixing up the cost of incarcerating a prisoner with the part of the cost of a college education paid by tuition?"

They are not related. I was discussing the options for raising taxes on the rich, and what might be done with those funds. New York has very high income tax rates on the rich.

Philo writes:

"The price [of incarcerating a prisoner for a year] is of course zero, as prisoners are generally not charged for room and board." Well, it's the *state government* that is buying the individual's incarceration (from its own bureau of prisons); the prisoner is not the purchaser.

Andrew_FL writes:
The US had 90% top rates in the 1950s, but the law was so riddled with loopholes that it collected very little revenue.

It's not even the loopholes. The thresholds were also much higher. The 39.6% Federal income tax rate kicks in for married filing separately (Before 1955 there was no separate system for married filing jointly) at $225,000 as 2013. That's roughly 4 times average income (nominal GDP/population). The 38.0% rate in 1950 kicked in at $10,000, or about 5 times average income. The 90% rate kicked in at $150,000, which was 76 times average income. Those taxes collected very little revenue because they applied to very few people. An equivalent 90% rate would apply to people making over four million dollars a year.

Andrew_FL writes:

I should say, well over four million. Closer to four and a quarter in 2015.

MichaelM writes:

They also weren't design to raise revenue. The loopholes were put there consciously, as a way of directing investment flows with the tax system.

The US economy in the middle 1940's was VERY centralized in its planning. The dismantlement of that war economy was a very extended process and Kennedy's tax cuts (moving us away from the 90% rate) were but one step on the path. Really, we're still trying to figure out how to dismantle the war economy leftover from WWII.

Brian Donohue writes:

Great post, Scott.

Very interesting comment from MichaelM.

I think it's interesting that while on a practical level, Leviathan is as odious as ever, we've actually come quite a long way on a theoretical/intellectual level over the past 60 years.

Benjamin Cole writes:

The Afghani psychiatrist story. Wow. Why did I not become a psychiatrist and tell prisoners they need to feel moral guilt?

Great post. But who is Cole? You never identify. Not me!

Yes it would be cheaper to place US prisoners in a modest hotel in Southeast Asia with $100 a day in spending money.

Interesting topic: I like prison Industries, and think we should have more.


Zack writes:

Andrew FL- yes. If I'm reading this correctly, less than 0.5% of the population had enough taxable income to face a marginal rate of 50% or more during those years, and only about one percent of filers faced a rate of more than 35%. Perhaps due to inflation, it looks like there was a large increase in those numbers from about the mid-70s to the early 80's, before the Reagan tax cuts.

Mr. Econotarian writes:

The US government took in higher income tax revenues after the Kennedy tax cut (and loophole closing) than before. The cuts actually did "pay for themselves."

Andrew_FL writes:

@Zack-Yup, we used to call that Bracket Creep.

Brett writes:

What's the problem there with the psychiatrists in California prisons? Psychiatrists are expensive in general (they earn nearly $200,000/year on average), and in this case they were even more expensive because a couple of state departments had to hire some of them in a hurry (and ended up trying to lure away each other's workers). It's never cheap when you have to hire a bunch of already expensive professionals on a very tight schedule.

As for pensions, it's the same as always - the numbers are skewed upwards in every state because of the generous pensions that firefighters and police get. Take those out, and public sector pensions aren't particularly generous (especially when you consider that in many states, they're not eligible for social security). We could drastically reduce the provision of such firefighter and police pensions (and I support this), but you'd have to offer them much more in regular pay upfront to keep the same retention levels.

Scott Sumner writes:

Andrew and Michael, Good points.

Ben, My mistake, Jonathan Cole

Zack and Mr. Econotarian, Good points.

Brett, What explains the different prison costs in NY and California?

It's interesting that they had to be hired "in a hurry". I presume that's because the courts required them to do so. Maybe the courts should have given them more time.

There is also lots of waste because police are asked to do jobs they have no business doing. For instance, in my state they must be used to direct traffic at construction sites. It's very wasteful.

Arun Khanna writes:

Scott, I'm curious how you think we should fund colleges. IMO we should remove all subsidies for college(including federal student loans) and replace them with income-sharing agreement based on the college and the major the student is studying for(for about 15-20 years). The college then has an incentive to increase their students earnings through job fairs, co-op programs, and other investments in human capital(rather than fancy dorms and sport stadiums). The students who benefit from going to college will end up paying for it.

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