Sunday, February 9, 2014

The Glory of Eisenhower?


NOTE: These posts have been reproduced from my old blog, "Random Notes", because I plan to cite their contents in an upcoming essay. I have finished the essay, but, unfortunately, it cites a lot of essays I have not yet reproduced. So it may take time to find and post all of them. Until then, you will like see a handful of these essays popping up on my blog amid a few new essays.

I was reading the comments on my blog and realized that, for once, I actually agree with the Idiot twins, or at least one of them. On the other hand, as the aphorism goes, even a stopped clock is right twice a day, so that shouldn't surprise me. After all, if our multi-named, non-Moshe Idiot constantly says "X should be run privately" odds are good he/she will hit upon a number of correct beliefs. the problem is, he/she believes the right thing for the wrong reason. Not that such a belief is unique. Many bad philosophies had elements on which they were correct. For example, the Nazis were right to call for self-determination in the Saar. of course, they only did so because they anticipated a win, but that does not mean the position was wrong. Similarly, liberals are right for calling for an end to "corporate welfare"  -- well, in some of the definitions, sometimes they define it a bit too broadly to include things such as reductions of tax rates -- but that doesn't mean liberalism is right, just that a wrong headed philosophy can be right on some issues.

And so it should come as no surprise that either Idiot sometimes hits on a correct idea. Nor should it come as much of a shock, at least for regular readers, that I hold positions that are seen as rather extreme, sometimes even unworkable. And this is, as you expect, one such case. No, I am not talking about eliminating medical licensing, or prescription laws, or eliminating public education, nor selling off broadcast airwaves as unregulated private property. In this case, I (agreeing with President Madison), believe it is not the role of government, local or national, to provide roads. I know, many think this is madness, but then again Europeans can't believe private railways work, and many of our counties think private liquor stores are wrong, so many people believe the government "must" do thing private individuals can do perfectly well, most often even better.

However, such a contentious issue requires more time than I have to give it, and, despite the support of such an august individual, as President Madison, I expect the "barbarous relic" argument I always hear about the gold standard, that is "that was fine then, but now in modern times it won't work." ("Stupid Quote of the Day (January 7, 2012)") I would argue that, just as the gold standard is still right, even with all our changes, so is private ownership of all but absolutely necessary facilities (which includes court houses and barracks, but not road systems), but that argument is a long one, and I am sure I will have to not only argue why it is possible, but fight against those who will make many arguments about roads being "essential", using arguments that would justify government spending on anything and everything. So, rather than fight that fight with inadequate time, I will do something akin to what I did in "Minimal Reforms" and argue for a first step in the right direction, and that is eliminating federal involvement. If roads are returned to the states and counties and cities, townships and other local governments, perhaps it will become more clear how smaller and smaller units can provide necessary roads, until we realize the smallest unit of all, the individual, can do it as well, and government can be removed. At the very least, I can show how federal involvement, specifically the federal highway system, presents a real threat to federalism, and is clearly a bad idea.

Well, I suppose the first point I have to establish is a simple one. The federal highway system is not really a highway system at all. The federal government has no Department of Transit, there are no federal highway crews. What the interstate highway system is is, like most federal programs, a bit pot of tax money. The money is then doled out to the states to build or maintain roads designated federal interstate highways. There are federal regulations about what qualifies, and about standards for these roads, but, beyond those regulations, and federal "oversight", by and large it is amounts to federal handouts to states to maintain what would otherwise be state roads.  Of course, there is a bit more to it than that, as should be obvious. The federal government requires these roads connect various places, meaning the states must also build some roads they would not otherwise, but for the most part, the federal highway system is nothing more than federal funding for state highway building and maintenance.

I wanted to point this out because, far too often, when we think of "interstate highways", we are under the delusion that, but for the federal government, they would not exist, and that simply is not true. Ok, some might not. A major four lane strip of asphalt connection East Nowhere to West Nowhere might not be built had the state needed to fund it itself, out of its own tax dollars, but likely there would be some sort of state road. So, while we might not have superhighways through the middle of nowhere, had the states been left to their own devices, we would still be able to drive coast to coast, and Mexico to Canada, without resorting to dirt tracks or lengthy ferry boats rides due to the absence of asphalt.

The realization that the "federal highway system" is just a funding method also points out three other realizations, which help to show ts true nature.

The first is how much of a bad deal this is for most states, if we view it from the point of view of the taxpayer rather than the politician. Think of it this way. Let us say, a highway would cost each taxpayer $100. If your state were to do it itself, it would tax you, say $125 to cover the building, as well as administrative overhead and other government waste, and you would have the highway. If we do it by federal "matching" of state contributions, the state would tax you only $67.50, but, because the federal money would have not only state, but federal overhead as well, the feds would likely end up taxing you $100 or more.

Perhaps it would be more clear if I made the assumptions obvious. At each stage in the process of distributing funds, there is overhead. There are administrators, there are auditors, there are compliance reports, there are inspections, and so on. So, if your state builds a road, you have one layer of overhead. The state had administrators, it bids out contracts, it inspects, and the like. In short, it costs more than a similar project by a private firm, but only as much as the state adds on1. The federal government, however, adds another layer of overhead. In that case, the state still does all its inspection and contracting and so on, but it also must comply with federal regulations, reporting to the federal government, undergoing federal oversight, and supporting federal administrators, adding tot he overall cost. Thus, when money is collected by the federal government and sent back to the states, the overall cost of any project so funded is higher, as some of the funds are lost in the trip through the federal bureaucracy. (In some cases, a quite considerable amount.)

I have discussed this before, in arguing for the return to direct state funding of the federal government ( "What we need", "Making Taxes Hurt", "The Benefits of Federalism", "Minimal Reforms"), arguing that such direct funding would eliminate a lot of such schemes, as the states would have no interest in sending out money only to have it returned reduced by 20% or so. However, that would only apply under such a regime. given our current tax scheme, it is clear why such funding is appealing to local politicians (excluding the wealth redistribution aspect we shall discuss soon), and that is that it shifts the blame for taxes. 

In our example above, if the state were to build the road, they would have to tax each citizen $125 to provide the $100 highway. Even assuming the citizens were not upset at the overhead, and they probably would not be, the fact remains state taxes would have to be set at a rate that would provide the $125. On the other hand, if we adopt the federal matching scheme, then the state must only provide $67.50. The remaining $100 would be obtained through a combination of federal taxes and monetary inflation2. As a consequence, while citizens would end up paying $167.50 rather than $125, they would think they were paying much less in local taxes, and would instead, if they blamed anyone for high taxes, would end up blaming the federal government. Of course, as both overall rates would be lower than the original $125, it is possible that our citizens, being somewhat naive about taxes3, might actually be happy to be "paying less" even though, overall, they were paying much more. And thus, by basically "laundering" the costs through the federal government, state government can avoid the onus of high tax rates.

Some will point out the obvious fact that not all federal highway funds simply come back to the states which paid the taxes. They will argue one of the benefits of such funding is that it allows poorer states to receive funds from more wealthy states, thus providing more uniform highways nationwide. For the moment I will ignore the irony of some supposed conservatives endorsing a redistribution argument between states they would reject were it between individuals, and focus on some other problems with this theory.

The first is the simple truth that federal funding is not allocated based on "need" or "necessity", despite all such claims4. There is no such thing as objective "need". Does the highway into Tulsa need two more lanes? Well, it would relieve congestion, but is it worth the cost? To make such judgments depends entirely on individual value judgments. In our everyday life we decide based upon our personal desires whether potatoes are worth more than a comparable amount of corn. but the government has no such values. And so, at best, we end up with the personal values of "experts" or panels of "experts" being used to decide such matters5. But, far more often, while the government pays for such studies (and thus increases overhead even more), they end up making such decisions based upon political self-interest, at least in part, using studies to do little more than justify their own decisions.

Which is the reason I argue redistribution is not likely to be as even handed or beneficial as many think.

Given that there is no rational basis for the distribution of highway funds, two competing systems will likely be proposed. First, there will be the proposal that the funds be pooled, and divided between all the states, or perhaps congressional districts, on some equitable system, perhaps a certain amount per mile of highway, or per citizen. The specific proposals would obviously vary, with more highway dense states asking for the first, more populous the second. But, basically, this system would require the funds be distributed based on some criterion, which, for the most part, would closely parallel taxes, as states with more people, or more highways, tend to be more wealthy, meaning this system would likely, though involving some small redistribution, not redistribute taxes very much6.

The second system would be the one most likely to result in significant redistribution, and that would be reserving all or some of the money for specific, defined projects. That would mean, in place of, or in addition to, normal per state distributions of funds, additional funds would be available for specific projects. This system would be the one which would allow for anything more than a token redistribution of funds from wealthier to less affluent states.

It should be obvious that such a system would tend to still favor the wealthier and more populous states. Granted, there are a few powerful legislators from small states7, and a block of small states could probably derail debate, so there will be some small concessions to smaller states, but, for the most part, political influence comes from the populous states, and political money comes from the wealthy ones, making those states relatively influential. And so, though there might be some redistribution, in the end it is likely the larger states will still get the bulk of such specific grants, leading to federal funds largely being distributed in proportion to the taxes received from the states, eliminating the one seemingly plausible argument for channeling money through the federal government first.

This system of political patronage also points out, at least in part, one of the larger problems with federal funding of highways, though the same problem is made worse by the way in which money is distributed. That problem is the proliferation of unnecessary construction. Of course, as I said, there is no rational way to define what is or is not needed. So, what I mean by "unnecessary" is not that it is not needed by some objective standard, but, instead, that, were the state, or locality, required to pay for the project with its own funds, would it do it. That is, would a state, or county, or city, pay the costs of this project were the federal highway system not involved.

And, for many such projects, the answer is "no". But, because of two very specific phenomena, such highways often get built anyway, and, from the perspective of the politicians involved, it makes complete sense8.

The first, and most obvious, issue is money earmarked for specific projects. Such projects often come from the states themselves, but can also come from the federal government, and have little or nothing to do with the legislature of the state. However, once the money is allocated, it makes no sense for the state to forgo such funds, and, in fact, may be damaging to do so. First, many such projects involve multiple states, and were one to refuse, it might harm other states, a situation which is likely to force many states to agree, as the wrath of neighboring states could be quite detrimental to future projects. 

But, even when no such issues are involved, there is every incentive to make use of such funds, whether the state believes the roads are needed or not. After all, such spending does create jobs9, meaning any politician who refused it is open to some pretty potent election year challenges. In addition, even if it requires matching, obtaining such funds is worth the cost, as it is one of the only ways to recover money that left the state in the form of federal taxes. To refuse such money is to allow it to simply disappear, while taking it results in a number of free (or low cost, if matching is involved) new roadways, which could result in some election time success, as well as a number of new jobs, also obtained free, or at reduced cost. Once the money has been taken in taxes, the incentives to take it are far too great.

However, many such projects, those which have been specified at the federal level, are not those needed by any individual state. Or, at best, they may serve the interest of one or two of the states involved, but are matters of indifference to the rest. However, as such projects can be carried out for little or no cost, and in the process provide money and jobs to the state, the state government is likely to embrace them, making it far more likely unnecessary projects will be carried out10.

The other incentive for unnecessary projects, even stronger than the federal specification of various undertakings, are the unspecified funds. In the past, much was made of the fact that any funds left unspent were lost, making it sound as if the federal government was driving inefficient allocation. However, in truth, the federal government never needed to institute a "use it or lose it" rule, the states would be fools to leave money unspent. So long as money is available, politicians have every incentive to spend it, for very simple reasons11. We have already discussed the way that money and spending equal jobs, and the importance voters place on those jobs. Imagine how difficult it would be for a politician to explain why he allowed money to remain unspent, when he could have used it to create jobs. If even one constituent remained unemployed when he was sitting on such money, it is a certainty his next election rival would plaster the face of that unemployed man all over the airwaves.

Nor do we have to think only of jobs. Spending creates material output which can be pointed to as accomplishments by a politician. And so, if there remains enough money to add one mile of road, build a bridge or even repaint some roadway, it will be done if only so that politician can claim credit for having done something.As we tend to favor activist government, and seek those politicians who "do something", who we can turn to to solve all our woes12, whether it is their proper role or not, it becomes second nature for politicians to try to do as much as they can, in order to garner as much goodwill as possible.

As a result, the availability of federal funds, with or without that money being allocated to specific projects, will result in spending on projects the states and localities would not otherwise undertake. That is, were they required to fund such projects, they would not think them worth the cost, but with federal money being dedicated to such things, they choose to spend money in ways they would otherwise find wasteful.

But that waste13 is not the worst consequence of federal highway spending. That is, not to put too fine a point on it, the way highway funds are used to circumvent our federalist system, and have become yet one more way to exercise federal powers not granted in the Constitution14. Everything from seat belt laws to helmet laws to drinking ages have been made uniform across the nation through the threat of reducing or withholding highway funds. Even matters which seem only tangentially related to highways have been pushed using the threat of withholding this massive annual federal gift.

And that is probably the best argument against federal highways. I know they were created with the best of intentions, but that is true of many bad things ("Grow or Die, The Inevitable Expansion of Everything", "In The Most Favorable Light", "Tyranny Without Tyrants"). The truth is, so long as we have federal funding of items which should be state run, the benefits of federalism will never be recognized. 

The greatest strength of federalism is the existence of many competing views, with each state trying its own solution, and the individual citizens, and state governments, able to compare the many competing theories, deciding which work and which don't, adopting the best and dropping the worst. ("Inflexibility and Bureaucracy", "Redundancy as a Protective Measure", "The Benefits of Federalism", "Adaptability and Government", "A Simple Solution") But, if the federal government funds state projects, not only will that funding, and the necessary oversight, tend to create uniformity in the area funded, the ability to manipulate that funding will give the federal government the ability to coerce uniformity even in unrelated matters. And, if that is possible, then we have no true federalism.

So long as we have central funding, we do not have federalism, we have a thinly disguised single, central government.

And that is my argument for the elimination of federal highway funding. I am well aware most readers will not believe me that we can eliminate state and local funding of roads as well, so I won't go into that, but I would hope, in the spirit of my argument in "The Solution", that we can agree that federal highway funding is not only a great blow against federalism, but also an inefficient way to fund roadways. If the same money were left in the hands of states, or counties, it is far more likely it would be spent on more urgently felt local needs, be they roadwork or otherwise. Instead of a politically allocated, federally controlled source of funding, which must be spent on highways, and in the amounts decided by a small number of congressmen, why don't we leave it tot he smaller units of government to decide how their funds should be used? We may lose a few scenic highways through isolated areas, but in general I think we will end up much better off.

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1. There is also the overhead of taxation, that is the money lost to the tax collecting process itself, as it costs money to gather money. But, as both state and federal government funding relies on taxation, we can assume both suffer equal overhead costs here, and ignore it. though, compared to private construction, this is yet another net loss, money we must pay over and above the true cost of receiving a roadway. Then again, this is an inevitable overhead in all government ventures. (This shall be discussed in another post, as it is part of the cost-benefit analysis of government versus private projects that is often overlooked.)

2. Obviously both state and federal could borrow, or issue bonds as well, but I ignore those for the most part. I mention inflation only because it is a power unique to the federal government, allowing it to hide spending much better than the states. While states can borrow to avoid taxes, that borrowing is obvious, as is federal borrowing. However, printing currency often escapes the notice of the average taxpayer, and, while the consequences are much worse than taxing or borrowing, it is politically much easier for politicians. ("Inflation and Uncertainty", "Bad Economics Part 7", "Bad Economics Part 8", "What Is Money? ", "What Is A Dollar?", "The Gold Question, Not "Why?" But "When?"", "The Secret of Success, or, Why Government Fails")

3. I do not mean to look down on the average tax payer, as I have said before the average person is much more astute than those on the right or left give them credit. I also believe such condescending attitudes tend to cause us to adopt danger political views. ("Sheep", "Arrogance and Gun Control", "Appealing to Arrogance", "Liberalism, Its Origins and Consequences", "The Era of the Cocky Know It All", "Utopianism and Disaster") However, most people, myself included, tend to pay attention only to some of the things around them, and tend to focus on only those of interest to them. They also can learn only so much, and so tend to have blind spots. And the state is very adept at taking advantage of those blind spots, and using them to make a better impression. For example, most people are happy to get a tax refund, not thinking that means they gave the government an interest free loan for some part of the year. Not being focused on finance, rates of return, net present value and the like, they simply see a check coming to them, are happy they did not end up owing money, and take the money gratefully, without a thought of the negative implications. Similarly, I think if both state and federal tax rates stay below certain levels, people will think taxes "low" even if the combined rate is such that, were either to charge it alone, they would object. (Nor are such errors limited to amateurs. Economists can make foolish errors, for example the FairTax supporters' claim that their 23% embedded tax will simply replace the 22% "hidden" taxes now present, ignoring the uneven distribution of such hidden taxes, as well as the role some such taxes pay in keeping specific industries viable. See "Inequitable Taxation")

4. Such words actually have no meaning, at least none separate from some implicit value judgments. See "The Most Misleading Word" and "Luxury and Necessity".

5. I already anticipate individuals asking how private roads, or even local government, could resolve this problem. And that is why I have suggested keeping such decisions on as small a scale as possible. If we move from representative government to true participatory democracy, the locality as a whole can vote on whether or not a particular piece of construction is worth the cost. Of course, some will still end up paying for things they do not want, but at least for the most part, roads will be based on some sort of individually felt need for them, rather than political patronage decisions. (Private roads will be built, obviously, by those who think they are worth the expense and are willing to put forth the funds. But, as I said, that is another essay, for, long as this one is becoming, that one will demand even more of my time.)

6. There are countless technical issues we are ignoring. Such as, whether states must submit proposals for new building, or are simply vouchsafed set amounts for new construction. How funds are divided between construction and maintenance. Whether states must match contributions or not. How such projects are overseen and audited by the federal administration and so on. However, since we are concerned entirely with the bottom line, these can be ignored for now, and we can focus simply on the amounts and how they are distributed.

7. Senator Byrd is perhaps one of the best examples of a politician with influence out of proportion to his constituency. Then again, in the senate, population is less relevant than  in the congress, where state representation is directly proportional to population.

8. Actually, many such decisions are rational for tax payers as well, if we consider the federal taxes a given. Provided the taxes have already been collected, it is rational to try to recoup as much benefit from them as possible for the tax payer. It only becomes irrational if we are given the option of changing whether such money is taken in federal taxes or not.

9. Federal or state spending does not "create jobs" in an absolute sense. The amount taken in taxes would have created the same or more jobs had it been left in private hands. ("War Stimulates the Economy? Let's Nuke San Francisco!","Stupid Quotes of the Day (January 26, 2011)") When I say here that the spending will create jobs, I mean, as the money has already been taken, accepting the funds for the specific federal project will result in more jobs than turning down such funds. That is all I intend here.

10. It is not worth going into here, but the incentives for projects carried out by government are very different from the incentives for private spending, making it far from likely that federal projects will truly be those desired by the recipients. In some cases the government undertakes actions to provide what constituents believe is needed, but most often even then the approach ti chooses is far less efficient than would be chosen by a private undertaking. (See "The Inherent Disappointment of Authoritarianism", "The Inevitability of Bureaucratic Management in Government Enterprises" and "Fear Driven Enterprises".)

11. This is especially true if money cannot be put away for later expenses. When money can be saved, it is possible, though unlikely, a particularly fiscally conservative constituency may make it politically sensible to hold onto unspent money. But such conditions are unusual in our time. (Though see the support Jackson received for fiscally conservative policies especially during his second term.)

12. See "The Single Greatest Weakness", "What We Deserve", "Who Is To Blame?", "Don't Blame the Politicians" and "Doing Something".

13. that is not to say state, or even local, spending would be free of waste. State administrations may, in the same way, end up funding projects local government would not choose to do. My only argument is the more localized such spending is, the smaller the scale of wasteful spending, and the less money available. Until roadways are privately owned and built, government will always undertake projects which some find too costly for the benefit received. I only argue that localizing control will reduce the scope of such dissatisfaction.

14. much attention has been paid tot he interstate commerce clause and general welfare clauses, and they have been used in any number of ways. In fact, the topic in question today is often justified by one or the other. However, while we federalists often attack these large, general propositions, we accept their specific applications which can be more dangerous. In "Minimal Reforms" I argued federal law enforcement could be used to circumvent federalism, and that is but one threat. Federal civil courts (especially with class action rules sucking in countless cases) could be used to circumvent other federalist principles (cf "In Praise of Contracts") as they have in reshaping liability law nationwide, for example.  Similarly, federal funding, of highways, of schools, of anything, can be used in the same way. Highways have been the most notable, as they are both ubiquitous and costly, but there are several other tools should we eliminate highways.

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POSTSCRIPT

I was going to include another argument, but it just did not fit. In terms of redistribution from wealthier to poorer states, there exists one more argument. If a state is so poor that it cannot even afford to pay for roads to connect its population centers, then it seems unlikely it really needs such roads. If the population is so small, and earns so little, why do they need massive highways connecting their impoverished, underpopulated hamlets? It seems small asphalt lanes would be more than enough. Not, of course, that any state is so absurdly poor as some of the arguments would suggest. Many who argue for wealthy states funding highways for the poor would let you think there were state of such a destitute nature, so I thought I would point out that such states probably have more urgent needs than highways, and so they too would probably be better served by leaving them the funds rather than forcing them to build and maintain highways connecting tiny villages with minute populations.


Originally posted in Random Notes on 2012/07/30.

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