Some unpleasant fiscal arithmetics

One frequently hears in France that our tax system should be more progressive, because it is supposedlynot progressive enough. Indeed many proposals and actual policy measures go in this direction, like payroll tax cuts on low-wage earners, capping some family benefits, the 75 % tax on high wage earners, or introducing progressivity in an additional tax invented a few decades ago and called CSG. Yet as long as a serious effort is not made to reduce the size and scope of the government, these reforms are bound to crash, for a very simple reason: The highest the average tax rate, the smaller the scope for progressivity. The reason is simple: in such a situation, cutting taxes on the poor can only be matched by near confiscatory taxation on the rich. These people will likely exit the country (as did Gerard Depardieu and Mathieu Valbuena), or severely reduce their labor supply (as many medical doctors do). The economy will suffer large distortions and in the long run will probably end up on the wrong side of the Laffer curve for the tax receipts coming from the rich. Suppose the government wants the bottom 20 % of the distribution to pay no taxes, the next 60 % to pay an average tax rate, and the top 20 % to make up for the rest. With an average tax rate of 40 %, the top 20 % need to pay an amount equal to 12 % of aggregate income, i.e. an average tax rate of 60 %. But when the average tax rate is 50 % (as in France, although the long-term figure should be even higher), the middle class pays 0.6*50 = 30 % of national income, and we need the top 20 % to pay an average tax rate of 100 %. If we now remember that we cannot have such jumps in the tax schedule and that there will be large distortions, we see that the scope for progressivity is quite small. When the government confiscates 50 % of more of national income, pretending to implement a highly progressive tax schedule is simply a lie. Everybody has to contribute a big deal. This is why each time money was really needed, governments resorted to broad-based measures like the introduction of CSG, raises in payroll taxes, VAT, or corporate taxation (without mentioning the clearly regressive gasoline tax which has the merit of having a broad and inelastic tax  base). How about making the expenditure side more redistributive, for example by capping pensions, excluding people above a certain income level from access to public hospitals, privatizing theatres, operas and museums, and introducing tuition fees in higher education? After a while people will integrate those restrictions in their economic calculations and they will likely result in huge economic distortions as the implicit marginal tax rate associated with losing those benefits is very high.

Advertisements

Why is state art obscene ?

There has been a little uproar in France about a recent exhibition by contemporary artist Paul McCarthy. In particular, a giant inflatable reproduction of an erotic toy, known as anal plug, was installed on one of the landmarks of Paris’s classical architecture, the Place Vendôme. The artist was physically attacked and the installation subsequently vandalized, i.e. disinflated. Official representatives, such as Mr Hollande, the President, Mr Valls, the Prime Minister, and Ms Pellerin, the Minister of Culture, have reacted with outrage. So has the cultural establishment, which has predictably invoked freedom of speech and the right of the artist to be provocative and to challenge bourgeois social norms.

It should be pointed out that Mr McCarthy cannot conceivably be rebellious, and even less revolutionary. This is State Art. The exhibition is taking place in a public museum and on public places. It is therefore decided by public officials with the agreement of politicians (and funded by the unwilling taxpayer). These public officials have decided to exhibit pornographic objects, among many other possible choices. They are responsible for this choice. The only rebels in this story are those who disinflated the installation.

For centuries, art was about eliciting an esthetic emotion ; it is now defined as an object, or an action, meant to embody a concept. The more « provocative » and « challenging » the concept, the more this is art. According to those standards, obscenity is the apex of art – although, in practice, the entire establishment applauds the obscenity and is outraged when it is being disinflated. So the real artists, by the very official standards, are actually the disinflaters.

Historically, official art always existed ; its purpose, presumably, is to strengthen the power of the elite. This is why official art usually is monumental and loaded with respect. The Arc de Triomphe in Paris is a typical example. It is not particularly beautiful but quite conspicuous and emphatic ; the sculptures are by talented artists whose task was to associate esthetic emotion with patriotic feelings. This is a bit the same technique, if you want, as that of having a woman in swimsuit posing on a car in order to make you purchase this car (although it appeals to higher kind of emotion).

Most of “contemporary art” is similarly oversized, which confirms its official nature. However it does not convey respect and consensus ; instead, it is supposed to be disrespectful and divisive.

The authoritarian regimes of the twentieth century were predictably keen on official art. Like the Arc de Triomphe, their official art was meant to strengthen society by uniting it in a common emotion. The regime hoped to get approval through the admiration for the representation of muscular aryan or proletarian heroes saturated with willpower. Of course, inevitably, commissioned artists are mediocre more often than not, but this is not systematic. The masterpieces of Eisenstein, Prokofiev, and Shostakovich were propaganda pieces. The regime of Louis the XIV repressed many artists by giving monopoly to a clique (for example, Lulli had the monopoly of Opera) ; but the members of the clique were themselves talented. Fascist architecture has been influential and admired in the democratic world.

Most interestingly, the Soviet and Nazi regimes were very keen on eliminating provocation, absurdity, and obscenity from their official art. Dadaism, cubism, surrealism, expressionism were censored and called degenerate by the Nazis and bourgeois and decadent by the Soviets. Presumably, they thought that this kind of art was ultimately harming them, perhaps because it would breed cynicism in the population, and because that cynicism would eventually be turned against the regime.

So we are faced with a paradox : why would a rational, self-interested elite promote obscenity in lieu of art ? How can they possibly benefit from offending many people with their own taxpayer money ?

Private individuals might want to do so, if only to advertise themselves. And actual art can occasionally be obscene, confer Courbet’s Origin of the world or many paintings of old lesbians and prostitutes by Schiele. However, in those examples, obscenity is not the point ; rather, an obscene subject is treated in an artistic way. In contrast, in McCarthy’s work, obscenity is the whole point. It is because they are obscene that these sculptures fit the official definition of art, because obscenity is the concept.

A naive explanation is that obscenity is what the elite actually likes. But it is hard for me to imagine Mr Hollande or Ms Pellerin purchasing a sex toy to ornate their bedroom. They, at least from the outside, look like reasonably banal individuals with a rather conservative and austere lifestyle. If they own dildos it is unlikely to be for artistic reasons and they are unlikely to publicly boast about it (and rightly so). The former minister of culture Jack Lang was one the key promoters of conceptual art and rebellion ; he was in power when French cities were being devastated by graffiti that, in addition to be mass vandalism, all looked the same. He famously approved of those graffiti as a form of art. Vandalism is art when the Party says so. Vandalism is vandalism when it is the Party’s art which is being vandalized. Yet to my great surprise, I came across Mr Lang while visiting one of the most outdated conservative museums in France, namely Pierre Loti’s house in Rochefort. As an official, Mr Lang was inaugurating conceptual gigantism and praising the vandals. As a private person, Mr Lang was indulging in exquisite late nineteenth century eclectism. From this I conclude that current State Art does not match the tastes of the elite any more than socialist realism fitted those of the Soviet apparatchiks.

If we want to understand why official art is obscene, we have to start discussing what it actually does.

If I was exhibiting the kind of object that was installed on Place Vendôme on my desk while talking to students, I would for sure be indicted for sexual harassment. But when public officials do the same to thousands of passers-by, the notion of sexual harassment suddenly disappears. Some people are more equal than others with respect to criteria for misconduct.

Why do modern western societies criminalize sexual harrassment ? They do so, among other things, on the basis of the feelings of the victim. The victim feels violated in her intimacy, uncomfortable, and insecure. In other words the victim feels bad.

So here we have a clue : obscene pictures make people feel bad. This is why many societies repress obscenity, although one should concede that what constitutes obscenity varies considerably across cultures. In many Asian countries a couple cannot kiss in public. Move an Afghan peasant to a European city, and he will think he is in a whorehouse. In any case, even by common western standards, Mr McCarthy’s works are obscene — granted, these standards are quickly vanishing, but this may actually be intended by the likes of McCarthy.

So we have to ask : Why does the elite want the people to feel bad ?

One answer which is partly correct, is that we are faced with the political agenda of cultural Marxism. Cultural Marxism wants to eliminate bourgeois society from the inside by deconstructing its values. If you constantly attack bourgeois values such as the family, the nation, hard work, and so forth, you are making it weaker, and ultimately less likely to resist the establishment of a collectivist society. This rests on the brilliant observation that since collectivism makes people feel miserable, the only way to bring it about is to make them feel even more miserable in bourgeois capitalist society.  It is an uphill fight, but you never know…

So we can speculate that the cultural Marxists, having conquered a number of key positions, in particular since 1968, are using those positions to promote their agenda. This means, in particular, “deconstructing ” common bourgeois aesthetic standards, i.e. exposing people to a hefty dose of compulsory “contemporary art”. The depressed people, then, will have lost any defensive instinct when the revolution comes.

The problem with this argument is that it rests on the assumption that the cultural Marxists are already in power. If this is so, by weakening society they weaken themselves. They may well be wiped out by the revolution. It is not rational for them to depress people ; instead, they should find some self-congratulatory device that makes people feel good. Like the Arc de Triomphe or the muscular optimistic Aryan or Proletarian.

In fact, there are plenty such devices in operation. Take Paris-Plage, for example. Every summer, the Paris municipality dumps sand on the expressway along the Seine and installs palm trees and recreational devices such as volley-ball grounds. As in The Truman show, everybody smiles and is happy. And the happy people reward the Paris mayor by voting for her. By taking you to the beach, the Paris municipality acts like your mother and makes you feel like a happy little kid. In return, you love them just like you love your mother.

So, the elite does not systematically make people feel bad. More accurately, it makes them feel good in some places, and bad in other places. You feel good in Paris-Plage and you feel bad in Place Vendôme. Could it be that contemporary art is deeply intertwinned with geography ?

This leads us to our next question : Where is contemporary art ? Which places are targeted by contemporary art ? What is the characteristic of Place Vendôme which makes it a specific target ?

The Palais Royal courtyard has a permanent installation, called “colonnes de Buren”. It consists of a series of plain black and white truncated columns, with a lighting that makes it look like an airport track at night. It sparked much protest when Mr. Lang imposed it back in the eighties.

The Louvre courtyard has a glass pyramid, so that you can no longer see its façade.

The Versailles castle is regularly blessed with contemporary exhibitions, that make it impossible to enjoy the decoration of the rooms without at the same time enduring oversized provocative  “installations”.

What do the Place Vendôme, the Louvre, the Palais-Royal, and Versailles have in common ?

They all epitomize the official art of the “old regime”, and by old regime I mean not only the brilliant society of the XVIIth and XVIIIth century, but also the republics that followed, and that were keen on endorsing those symbols so as to benefit from the prestige and boost their own legitimacy.

But now we are in a “new regime”, i.e. the post-modernist faction which took over after 1968. While this faction would not go as far as the Taliban with the Bhuddas, they are nevertheless keen on polluting the official art of the preceding regime with their own “provocations”. The message is clear: this official art of the past is no longer official, and you are not supposed to enjoy it.

This leads to our last puzzle: why can’t the new “regime” do the same as the preceding ones and recycle the official art of the past for its own benefit? Answering such a question would be key to our understanding of the interaction between ideology and power.

In the past, the elite derived its power from being able to unite people, often against some external enemy. Now, post-modernist elites derive power from identity politics, i.e. dividing people between competing groups based on race, “gender”, disability, sexual orientation, etc. So it is somewhat important that official art should be divisive;  the goal is to please the grievance groups upon which the power of the new elite rests, while humiliating and harassing the others.

We observe that each grievance group is targeted with a specific form of “art”. For example we have rap music for blacks and various forms of obscene artifacts (such as Mr. McCarthy’s anal plug) for “LGBT” people.  In both cases, the mainstream, or the former mainstream, is meant to be insulted. Do the members of these grievance groups genuinely enjoy their group-specific form of art? What would Louis Armstrong and Oscar Peterson have thought of rap music? What would Oscar Wilde and Marcel Proust have thought of the giant anal plug? Or do they “enjoy” it only because it is an aggression against the mainstream, i.e. because it artificially unites the group against an “external enemy”?

New forms of power produce new forms of propaganda, and propaganda works as beautifully as ever.

Running out of other people’s money

There is much agitation in France concerning a number of cost-cutting measures the government is trying to implement in order to comply with the budgetary targets associated with our European commitments. Especially notable are the increase in a tax on pensions and the reform of maternity leave, whereby one is moving from a system where mothers can have up to 36 months of maternity leave, to a system where each parent has 18 months.

It is generally thought that this new system will, under a pretense of “gender equality” actually reduce spending, because most fathers will not take advantage of their eighteen months, while mothers will be compelled to halve their leave relative to the preceding system. It is also believed that the system will increase congestion in publicly-funded daycare centers, unless more slots are created there, which, as day-care centers cost more than 1000 euros per month per child, will wipe out any savings from the shorter maternity leave.

Angry middle class mothers contemplate being forced to separate themselves from their babies at a very early age, and, to add insult to injury, also being forced to fight against competitors for those coveted and rationed day care slots. Resentment builds up in anticipation of the suspicions of corruption, favoritism, and political and ethnic bias in the future allocation of this increasingly congested socialized resource. Ms Le Pen cannot believe her luck and is celebrating.

Generous maternity leave was implemented a couple of decades ago as a joint venture between “Santa Claus socialism” and “old-style feminism”. Old-style feminism recognizes that women are different from men, and concludes that taxpayers’ money should be used in order to promote the formers’  “work-life” balance. In the society that prevailed before the rise of the welfare state, women’s maternity leave was funded by their husbands; this was regarded as a form of exploitation. In order to free women, “society” had to pay for maternity leave. This meant that taxes had to be increased and consent withdrawn from the workers who had to finance those benefits regardless of their own personal choices and marital status. As for Santa Claus, his agenda was to collect votes from naive people by promising them freebies. Who could say no to 20 to 40 years of holidays (aka pensions) or to the dream of taking care of one’s kid at home while being paid an “allocation” and having her job kept warm at the office?

The problem was that as Santa Claus was pounding the population with benefits and entitlements,  costs inevitably soared, while the economy was nearing asphyxia under the burden of taxes and regulations. As people were more and more encouraged to participate in the zero-sum game of claiming benefits, and more and more discouraged to participate in the positive-sum game of voluntary exchange, the cake began to shrink. Santa Claus started realizing that the size of the cake was not sufficient to fulfill each kid’s Christmas list. Some of the children had to be reluctantly informed that there is no Santa Claus.

This is all the more painful than the poor people, after decades of being spoon-fed, can no longer take care of themselves. For one thing, they lost the habit; they cannot conceive that now that the government says they should stop work for eighteen months instead of thirty-six, they might remotely consider disobeying. But we can hardly blame them. The evil husband is no longer in a position to provide for his wife’s maternity leave. Half of his earnings are confiscated before they even land on his bank account, in order to fund, among other things, other people’s parental leave. The woman that the government has freed from the patriarchy has no other choice than organizing her life according to the government’s prescription, which means that the baby will stay with his mother for eighteen months, no more. Enjoy your freedom from the patriarchy!  Unless, of course, the family has enough money left, despite the heavy taxation…

So, in this society obsessed with egalitarianism and the fight against the “reproduction of elites”, we will observe that the children of the lower middle classes will be abducted from their homes at the age of eighteen months, to be taken care of by bureaucrats; at the same time, the children of the upper middle classes (among whom, conveniently, the apparatchiks who impose the Theory) will enjoy the benefits of staying with their mothers, or selected nannies, for much longer. Meanwhile, the boundary between those two social classes moves up, due to the swelling of the Tax Moloch.

Nobody in the establishment, though, will pay attention to that.

For one thing, the establishment is convinced that “professional” public servants do a better job at taking care of children than their mothers. I remember participating in a meeting of officials very concerned about “equality”, and they were brain storming about how to design schemes so as to prevent kids from the lower classes from spending school holidays with their family ( a number of representatives from NGOs which supposedly cared much about families, were nodding in approval). Their general prejudice was that kids from “privileged” families were spending those holidays taking intensive math and language lessons, while those from “disadvantaged” families were at best watching TV.  There was no mentioning of the inherent contradiction between subsidizing fertility at the lower end of the skill distribution and devoting public resources to separate the offspring of those subsidies from their “disadvantaged” environment.

But, more importantly, the Theory has changed. Old-style feminists have been replaced by Gender feminists. Now there is no difference whatsoever between women and men. In fact, there is no longer any presumption that the two parents should be of opposite sexes (actually those parents do not even have a sex, only an ectoplasmic “gender identity”). There is no longer a mother and a father, only a parent 1 and a parent 2. Surely, then, it would be unfair if parent 1 had a different parental leave from parent 2? So why don’t the people just obey and combine eighteen months of parent 1’s with another eighteen month of parent 2’s parental leave? Why does it matter to them? Don’t they know the Theory says it does not?

Now you may object that since — according to the Theory itself — parent 1 and parent 2 are interchangeable, one day of parental leave by parent 1 is interchangeable with one day of parental leave by parent 2. Therefore, why not give a total of 36 months to both parents, and let these two people decide on how to split it between themselves? Remember they are free. What does free mean? Or maybe “free” in “free from the patriarchy” has  a specific, unusual meaning, as in, say, “freedom is slavery“?

Now I am not familiar enough with the apparatchiks who apply the Theory to figure out why this obvious remark has escaped them. But I suspect they believe that Parent 1 and Parent 2, if left free to choose, would decide that the parent with the least stable and/or least paying job would take the maternity, sorry, parental leave.

This has two big drawbacks. First, it is what people want. Second, it is efficient. A Theory which would let that happen would be useless — it would make no difference if the Theory was not around. A Theory which makes a difference is one which compels people to do what they do not want.

The Theory is especially useful when the cake shrinks. It tells you who should have their piece, and who should be denied a piece. Households who prove the theory should have their piece. Households who disprove the theory should have nothing. Households who apply the theory will have 36 months of parental leave. Households who do not will just have 18 months.

You do not know how much you should bend human nature for the Theory to be true.  Lyssenko found out that he could not bend the nature of wheat by enough for his theory to be true. Others died. Our Theory is much more humane than Lyssenko’s; we just impose a little tax on those who do not conform to it. They are welcome to pay it and contribute to the consolidation of public finances; they are also welcome to dutifully take turns in child care between Parent 1 and Parent 2 and show that the Theory works.

 

 

 

New working paper (in French): Social networks and socialism

This new piece of research studies the role of social networks in a “socialist” economy where access to goods is rationed (in the paper, this is because of a price cap, but the argument may apply to other forms of regulations). In the model, social networks develop as an alternative device to access a trading opportunity for those goods. As a result, people overinvest in social networks — at the margin, they make friends with people they do not really like, or spend too much time with their relatives, because such networking may provide useful consumption opportunities.
The most interesting result is that regulation may be sustained as a self-fulfilling political equilibrium. This may hold provided some people benefit from it. Here regulation maintains prices below their market clearing level. It benefits the “poor” because they have to pay less for the goods. It harms the “rich” whose income is lower in the regulated society (in the model it is because they own shares in the firms that produce the rationed goods). These “rich” include the “average” individual, who is also harmed due to the price distortion brought about by regulation. Only poor enough people benefit, and that is only because more efficient forms of redistribution are not available.
If people’s ability to invest in their social network is heterogeneous, the expectation of a regulated economy will lead to the emergence of a social group who is well equipped in social capital (and therefore expects to do well in a regulated economy), but with relatively low income. This social class benefits from regulation because they have a privileged access to the goods that are rationed, thanks to their superior social network. They benefit from low prices while not suffering too much from rationing. On the other hand, they are not poor enough to support regulation should they have not invested in their social capital. Therefore, these people validate expectations: if it is anticipated that the economy will be rigid, they invest in social networks and, because they are winners in the social networking game, end up voting in favor of regulation. If it is anticipated that markets will be left unregulated, they do not invest in social networks and vote against it. If this group of people is large enough, both rigidity and flexibilty are self-fulfilling outcomes.
The argument applies to social-democratic societies where a wide range of publicly provided goods are subjected to a price cap (or even free) and rationed. We may mention access to social housing, day care, medical care, summer camps, pension homes, music conservatories, and good schools. The model tells us that the system is supported by a social class of people who are relatively modest economically but well positioned to access those goods thanks to these connections. This article by Eric Le Boucher laments how opacity and complexity in the French higher education system ultimately favors the well-connected (in particular high school teachers) who know how to get into the right track. Indeed, high school teachers are modestly paid, but they are in an excellent situation to use their connections to get their children in the right place. And they have more free time than others that they can use to develop connections and gather information. They match the caracteristics of the social group I have just described.
Along similar lines, this article by Capital points out the pervasiveness of favoritism in the allocation of social housing in France; while sheer bribing is rare, social connections (and affinities) with the key decision makers is essential. One does not need to be miserable to be eligible for social housing. According to the article, 50 % of households in the Paris region are eligible — the proportion of social housing is less than 20 %. It is easy to figure out that among those 50%, the more connected and least poor among the eligible would be better-off in a free market system where they would not have spent as many resources to establish connections. But these resources are sunk costs and they end-up locked in in a situation where they gain from rigidity.

Limited government, consent, and supermajority

When you try to promote the notion of limited government in front of an audience, academic or otherwise, you are invariably confronted with two objections:

1. How dare you propose that the government should not intervene to redistribute money in favor of the poor and provide them with health and education?

2. We obviously need the government to intervene in order to correct market failures, the most important one being environmental externalities, and in particular global warming.

At this stage, you are in trouble. The first objection (often phrased in a borderline ad hominem formulation) makes you look like an unpleasant person. The second one makes you look like an idiot.

Of course none of these objections change anything to the fact that the government implements involuntary transfers under the threat of force.  From a libertarian perspective, there is no difference between environmental taxation and Greenpeace committing armed robbery in order to finance the cleaning of a river. Or between public welfare and a poor man getting 100 $ from you at gun point. Indeed, utilitarians should condone such muggings, as long as the marginal utility of wealth is larger for the criminal than for the victims.

Utilitarians know these difficulties and the reason why they lend so much legitimacy to government is because they dress its interventions under a pretense of consent. A naive concept of consent is the will of the majority, by which it is legitimate for two wolves and a lamb to vote over what to have for dinner. This parable illustrates that majority voting is not a source of legitimacy but (at best) a lesser evil, and that it makes sense only in places where a constitution imposes substantial restraints on the scope of government intervention. A less naive notion of consent is that of the “veil of ignorance”, by which we all pretend not to know who we are when making decisions. In the extreme, everybody would have the same preferences, which would conveniently turn out to be identical to some utilitarian social welfare function, with the weight on a person’s utility being equal to the probability that one is incarnated into that person’s type. If only people voted under such a veil, the allocation of resources would always maximize that social welfare function. All externalities would be addressed, and optimal redistribution would take place. In fact, such redistribution would rather be interpreted as insurance against being born poor. And all these policies would be consented to unanimously by the polity. Except that, in reality, there is no unanimity; instead there are salient conflicts of interest, which is prima facie evidence against people voting under a veil of ignorance. Therefore the question of consent seems untractable for utilitarianism. The only entity which voluntary submits to the policy prescribed by utilitarianism is an abstract being who pre-exists history and thus can vote under the veil of ignorance, or, worse, Rousseau’s “general will”.

Libertarians have exactly the opposite problem. By insisting that any transfer of resources must take place under the consent of both parties, they run into the issue that obvious gains from trade involving the coordination of a large number of agents (such as solving environmental issues) may  not take place. Even enforcing private contracts requires resources, and people would free ride by trying to undercontribute to the enforcement infrastructure.  It looks like operating society under consent, unless you believe that all the functions of government, including contract enforcement, can be delegated to the private sector, is a practical impossibility.

In principle, though, that is not the case. There may be a coordination problem in creating the infrastructure which is necessary for the conduct of the collective decision-making process. But once such an infrastructure exists (and historically it has been provided by the coagulation of violent armed gangs into actual governments), there is no reason why public policy should violate the natural rights of private individuals.  The reason is that if a policy (such as clean air) indeed improves social welfare, it can be implemented in such a way that all individuals are better-off. In other words it should command unanimous support, and therefore will not be implemented against the consent of any citizen. Indeed, imposing such discipline would compel authorities to systematically come up with a satisfactory scheme of transfers in order to compensate the losers from their policies. And if they cannot come up with such a scheme, it means the proposed policy cannot increase social welfare.

Of course, this remains theoretical. There are plenty of informational problems involved in eliciting the costs and benefits of policies; and some voters will lack the cognitive ability to make the correct choice. Nevertheless this suggests that, if we take consent seriously, there is considerable legitimacy in imposing that public interventions should be supported by a supermajority rather than simple majority. For example, a constitution should prescribe that any policy which involves imposing coercion on individuals needs approval of, say, 75% of the electorate.

Such a supermajority rule would compel policy makers, when proposing laws that solve an externality, to actually implement a side-transfer scheme that would compensate the losers.

For such a rule to respect natural rights, it is of course necessary that the default option – the option that is implemented absent a 75% majority in favor of a proposal — obeys liberal principles and has minimal government coercion. If the initial status quo is such that the corporation of shoemakers is highly subsidized, and if shoemakers amount to 26 % of the population, a supermajority of 75 % will be insufficient to remove the subsidy. A liberal constitution should make sure that the default option remains the one with minimal government intervention. In other words the default option should be different from the status quo. If the status quo were the default option, under the influence of shocks such as technical progress, one may end up with a situation where neither consent nor natural rights are respected. Suppose, for example, that a car toll for entering London is in place, so as to reduce pollution. Suppose that clean, non polluting cars based on nuclear energy are invented. The car toll should be removed. But if it is designed in such a way that 26 % of the relevant constituency benefits, it won’t go away. Or it could go away in exchange for large transfers in favor of those beneficiaries, which is unfair (it is fair to compensate you for a violation of your property rights; it is not fair to compensate you for losing a rent based on violation of other people’s property rights). In other words, public interventions should not be designed as entitlements, but as renewable schemes that must pass the 75% majority test each time they have to be renewed.

Where does that leave the need for “social justice”? For one thing, simple majority rule itself has no reason to deliver “social justice”. Indeed the most important items of the welfare state (health, education, and pensions) cater to the median voter. It is unclear to me why, in a modern affluent society, these people could not pay for their own health, education, and pensions (which they do, to a large extent, through the taxes they pay, except that it funds other people’s health, education, and pensions). As for the welfare state items that benefit the poorest members of society, since they benefit only a minority of people, they must either be the outcome of altruism or of the objective of avoiding “social unrest”. As for altruism, it has no reason to be mediated by the government: people can and do contribute to charities. Furthermore, what is considered as poverty in advanced economies is not poverty but inconvenience. For example, in the US, 95 % of households own a car, and of the 5 % that remain, many are affluent urban families for whom owning a car is just impractical. The fraction of households that are truly needy must be small enough for voluntary transfers to take care of them. As for the concern for “social unrest”, it is an externality and therefore there must exist a redistributive scheme for tackling it that should pass the test of supermajority.

 

This vicious world

I was recently contacted by a French media outlet who wanted me to comment on the “vices” of capitalism. They were a bit nervous about what I might say, so they ran a pre-interview to check whether my views were palatable to them. In fact they called twice to run such a pre-interview. I made clear to them that my position was in many respects critical of the general contempt in which most commentators and intellectuals in France hold capitalism. This does not seem to have pleased them, because they never got back to me to do the actual interview.

The incident is emblematic of a number of interesting phenomena.

First, you do not say something good about capitalism in the French media. Indeed, in an earlier episode with a French newspaper, I tried to pour some cold water on the hysteria against excess executive compensation and excess bonuses for traders. There was no way I could get the piece published.

Capitalism is deemed immoral even by the capitalists themselves. Unlike socialism, a label claimed by many political parties and states throughout the world and throughout history — including the Nazis and the Soviets — no entity on earth says it is capitalist. There is no capitalist party, nor is there any capitalist republic. No ruler ever decreed that his country will operate under a capitalist system. Conversely, I do not expect any French media outlet to run a piece on the “vices” of socialism. Socialism may fail, but it is generally considered as virtuous, unlike capitalism which works but is immoral. The general opinion is that the Soviets were good guys who failed, while the Nazis called themselves socialists just for fun, they were not really serious about it.

Of course, a key problem is that if there is no place on earth which claims to have a capitalist system, it is difficult to find out what capitalism really is and why it is so evil. Take France, for example. Many people call it a capitalist country, but that is a confusion due to the fact that it was in the Western block during the cold war. France may be a market economy, but is certainly not a capitalist economy. For one thing, 57 % of GDP is confiscated by the State. Also, private ownership of means of production is largely an empty notion. Firms are mostly in the business of implementing the myriads of regulations that specify their modus operandi–and they have to write a number of reports for the administration, to prove their compliance with the administration’s policy agenda. They are best viewed as semi-autonomous branches of the State. From an ideological point of view, no French businessman would publicly state that his business is about maximizing profits. Nor would he ever call himself a capitalist. Instead he says that he is in some sort of public service, and fully endorses the government’s ideological goals concerning sustainable development, the promotion of women in the workplace, the socially responsible enterprise, and so on. By doing so the businessman is slowly renouncing his rights to operate his business and is converting himself into a bureaucrat. But this is fine because, after all, the life of a bureaucrat is less stressful than that of a businessman, and we all hate capitalism.

I suppose some would say that capitalism is like pornography. They cannot define it, but they recognize it when they see it. For example, how about a firm laying off workers despite that it is not making losses? Isn’t that immoral? They do not have to do it, so it must be out of selfishness and greed. Isn’t this ugly, capitalist, and indefensible?

In fact, this is not more indefensible than a consumer switching from an expensive brand to a cheap one, or from a bad bakery to a good bakery. Presumably the bad bakery needs your money more than the good one. And eating bad  bread is not the end of the world. Why don’t you buy your bread at the bad bakery instead of the good one, so as to preserve the bad baker’s job? That is, just like pornography is other people’s eroticism, capitalism is other people’s self-interest.

More importantly, not only selfishness and greed are presumably the reason why those workers were hired in the first place, they are not going to disappear by magic under a socialist system. These are not properties of a system, but human traits. Under a capitalist system, one can give in to these instincts while making other people better-off through voluntary exchange. This is actually fascinating: imagine the number of people, working at Apple, Vuitton, Toshiba or BMW, who are paid to figure out what your neeeds and desires are? Instead, under socialism, where resources are allocated by the government, one plays a zero-sum game trying to extract resources from others through political mobilization, lobbying or corruption. Which situation is more immoral?

The second lesson from the episode is about how the media make use of “experts” so as to promote their own view. It is virtually impossible to read an article that does not interview some sociologist or economist. One could naively believe that the journalists have an utmost respect for those experts and are genuinely interested in finding out the scientific truth about contemporary issues…Of course this is not the way it works; the experts are just there to validate the editorial line. The journalists cherry-pick them and then cherry-pick the statements that they need from the interview. I remember having spent 45 mn on the phone with a journalist from “Le Monde” who was desperately trying to make me say that Sarkozy’s immigration policy was wrong. This was so obvious that I, somewhat sadically, carefully avoided any clear derogatory comment about that policy. Not hearing what she wanted to hear, she did not bother to use the interview or mention my name in her article.

 

Ubu sets prices

The French government is about to pass a law (so-called Duflot II) that establishes rent control for 70 % of privately-owned rental housing. The local representative of the government will regularly set a rent ceiling which will not exceed 20 % of the median rent in the area. Owners who have an “exceptional” house will have to ask for a derogation (once again) and demonstrate to government officials that their house is indeed exceptional.

This law is intended to address the problem of housing shortages  in selected areas (only these selected areas represent 70 % of the total supply).  No, there is no typo in this sentence. The supposedly educated elites in charge seem to believe that when demand exceeds supply, reducing the price by law helps.

In the face of such abysmal idiocy one’s first reaction is clearly to remain speechless.  But some economist has  to speak out…

How does the private housing market currently work? First, it is extremely heterogeneous. Even in a given area, apartments differ a lot by quality. So far we do not know how the bureaucrats who will set the dreaded local median rent will operate. How large will the relevant geographical area? How will apartment quality be imputed? Clearly apartments with vastly different market values will be forced into the same price. Second, even controlling for quality there is substantial price dispersion. The more expensive apartments stay longer on the market and the owner can pick among fewer applicants. The opposite holds for the cheaper apartments. These have many applicants, and the owner will usually pick the most solvent one.

The immediate impact of the reform will be to force the price of a large fraction of housing below its market level. Since the ceiling is indexed on the median in the area, these were the most expensive ones in relative terms. So the reform is not so much about reducing rents overall as about truncating the upper tail. These apartments were more expensive than average for a reason. Either quality was higher or the owner preferred income over applicant quality. In both cases, when the price is forced down, the apartment will either be withdrawn from the market or it will have more applicants. As pointed out above, this means that those who will get the apartment will be richer.  Poorer people who could have rented the apartment because they liked it and were willing to pay the price will simply be forced into lower quality products.

In the short run, the reform is simply making life harder for the very people it is supposed to help.  Similarly, a ban on renting rooms smaller than 9 square meters by the preceding government (amidst hateful  speeches against supposed “sleep merchants”), subsequently heightened the student housing crisis (the evil sleep merchants would no longer rent the rooms that the good people in government outlawed).

In the long run, the private rental market, which is already undersized, will likely disappear.  Investment in quality will fall because the owner will be able to reflect it in the rent only if Big Brother says it is OK.  There will be a race to the bottom in quality, because quality will be poorly measured by the officials and this will be a device to raise the effective (quality-adjusted) rent while complying with the law. If, as a result the median rent eventually falls — which is far from certain since withdrawing houses from the market will per se lead to rising prices — this will only make things worse as it will negatively impact the official rent cap.  (And furthermore one will be under the illusion that the law has worked in reducing rents while this would be incorrect adjusting for quality)

People with enough cash for an upfront payment will buy (you need to put 30 % of the value to be able to buy a house, because of regulation). Others will suffer in the jungle of public, rationed, rent-controlled housing and end up with a place they don’t like, in a neighborhood they don’t like, and be stuck with it for the rest of their life. More apartments will be rented through informal channels such as relatives or the black market.

The reform denotes pure contempt for individual property rights as well as ignorance  of even the most basic economic principles.