Summer Reading: Back to School Edition

Summer feels like it started just yesterday, but many parents have finished their back-to-school shopping and sent their kids back to school. In total, families are spending approximately $40 billion to procure staplers, binders, and the latest iteration of the dreaded school uniform. This total grows over time and will likely climb even higher due to sky-high inflation. This astronomical sum, though, still pales in comparison to the $727 billion federal deficit projected for the first ten months of fiscal year 2022.

Neither political party even pretends to care anymore about historically-high defense budget proposals nor pork barrel spending, despite the repeated warnings of economists and policy scholars that the current fiscal path is unsustainable. Before they return to Congress this fall, lawmakers ought to crack open an economics book or two to learn more about the consequences of their misguided policies. Below, the Taxpayers Protection Alliance highlights three critical lessons from economists that public officials would be wise to listen to:

1. Large, persistent deficits reduce opportunities for all.

Keep your eye on one thing and one thing only: how much government is spending, because that’s the true tax … If you’re not paying for it in the form of explicit taxes, you’re paying for it indirectly in the form of inflation or in the form of borrowing. The thing you should keep your eye on is what government spends, and the real problem is to hold down government spending as a fraction of our income, and if you do that, you can stop worrying about the debt.

— Economist and Nobel laureate Milton Friedman

Politicians love to talk about how their favored spending initiative is an “investment” in the future that will more than pay for itself via myriad positive outcomes. Some basic forms of spending are in fact investments that strengthen the foundations of society. For example, the federal government having administrative patent judges on payroll is essential for defending intellectual property (IP) rights and keeping America at the forefront of innovation.

Unfortunately, most spending is not so easily justifiable. For example, the Pentagon’s F-35 project has been a trillion-dollar boondoggle subject to multiple delays and basic supply-chain and operational issues that make America less safe. Instead of recognizing these flaws and scuttling the program, lawmakers have proposed doubling down with an unneeded second engine for the fighter jet that would cost an additional $6 billion in development costs.

The Pentagon’s fiscal foibles are only the tip of the iceberg. Federal auditors have blasted the rising costs of bureaucracy in Congressionally funded broadband programs, which continue to grow in size despite far faster, cheaper private deployment alternatives. And, the United States Postal Service (USPS) continues to hemorrhage billions of dollars per year in net losses (more than $90 billion over the past fifteen years).  The USPS is slated to lose even more money once they acquire expensive electric trucks incapable of efficiently serving most postal routes.

All this spending imposes a hefty double cost. The appropriations lead to high opportunity costs across the economy by steering some of the nation’s brightest minds toward wasteful operations. It’s frustrating to think of all the ways that aerospace engineers’ time could be better spent than on the F-35 mess. Additionally, the spending must be paid for eventually via higher taxes or inflation or both. Thanks to profligate spending, hundreds of Americans are seeing inflation eat into their salaries at an unprecedented pace. And, as detailed in the next section, taxes are also on the rise.

2. “Soaking the rich” results in higher taxes on everybody.

[T]he tax burden—the hurt caused by taxes—is not borne entirely by the people who write the checks to the Internal Revenue Service. To some extent many taxes are “shifted” to other members of society. For example, because highly progressive taxes discourage people from entering high-paying professions, salaries in these professions will be higher than otherwise. Therefore, the taxes paid by the upper-income taxpayers who do enter these professions overstate the true burden of taxation on them. Also burdened by these high taxes are the people who pay higher prices for the goods and services provided by the people with higher salaries.

—University of Michigan economist Joel Slemrod

With new administrations come the same pledges and promises wrapped up in different wording (and endless qualifiers). Since being sworn into office, President Biden has claimed that he won’t raise taxes on households with annual income of less than $400,000. That’s the State of the Union version at least. At various times, Biden has said “nobody” or “no one” making less than $400,00 would pay higher taxes or that only individuals are subject to this limit. In any case, this is not a pledge he could possibly keep when the President and his Congressional allies repeatedly insist on increasing the cost of doing business.

For example, the recently signed Inflation Reduction Act imposes a new 15 percent minimum tax on corporations with book profits exceeding $1 billion. It’s hard to see how this policy would not result in higher taxes on working-class Americans, when all the evidence to date suggests that companies pass along higher taxes to consumers and workers. One working paper published in 2020 in the Bureau of Economic Research found that about a third of the money raised from corporate tax hikes comes from consumers in the form of higher prices while nearly forty percent comes from workers via lower wages. But, because these impacts aren’t immediately obvious to the bill’s architects, the “tax pledge” remains intact.

In contrast, slashing tax rates from the top down grows the pie for everybody. In the 1980s, President Reagan lowered top tax rates to 28 percent and the economy charged forward in a record-long peacetime expansion. And, even as Reagan and his legislative allies repeatedly lowered tax rates(taking effect starting in 1982) income tax collections as a share of the economy held stable at around 8 percent – around the same share achieved by the far higher tax rates of the 1970s. Sure, tax rates were far lower under Reagan, but rapidly rising incomes meant a surge in total taxable income across the economy. 

3. Rules to try and steer “undesirable” behavior often have harmful unintended consequences.

Negative unintended consequences often emerge when a simple regulation is imposed on a complex system. Regulations are relatively simple because regulators cannot possess all of the relevant knowledge regarding the workings of the complex institutions that underpin economic and social interaction. Because of their simplicity, regulations often change the incentives individuals face, resulting in unforeseen consequences.

—George Mason University economist Christopher Coyne

It’s easy to get caught up in the simplistic logic that gives rise to unwise regulations. If policymakers are led to believe that a certain product or activity is killing or hurting people, the natural response is to place restrictions on it. Officials often fail to understand that people and markets are complicated and introducing new rules into the system can pose no shortage of issues (but certainly shortages of other things).

The Food and Drug Administration’s (FDA) misguided war on smoking cessation products is a great example. Vaping products have repeatedly been shown to be (at least) 95 percent safer than cigarettes and far more successful than other smoking cessation methods (e.g., nicotine patches and gum). Yet, a motley crew of FDA officials, lawmakers, and “public health” warriors seem far more focused on stemming the alleged youth epidemic of vaping. One target has been flavored vaping products, which supposedly act as a gateway to youth nicotine addiction.

As TPA Consumer Center Director Lindsey Stroud explains, efforts to save youth from vaping come at a tremendous cost: “the FDA issued denial orders for nearly 1 million flavored e-cigarette e-liquid products…[even though]… flavors are popular among adult e-cigarette users… a 2018 survey of nearly 70,000 American adult vapers ‘found flavors play a vital role in the use of electronic cigarettes and vaping devices,’ with 83.2 percent and 72.3 percent of survey respondents reporting vaping fruit and dessert flavors, respectively.” Targeting flavored products for denials, then, only makes these products less desirable for adult smokers trying to kick their deadly habit. Yet, agencies rarely bother to consult the evidence (or economists) during their many crusades.

In conclusion….

Lawmakers have their homework cut out for them before reporting back to Washington, D.C. There’s no economist nor researcher nor publication that has perfect insight into public policy. But, TPA hopes that economists such as Drs. Friedman, Coyne, and Slemrod can give lawmakers the insight they need to reverse course on the sorry status-quo.