A straightforward objection to the style of policy I proposed as “market dirigisme” in the previous post is that it’s too expensive for the central government to pay to subsidize all the behavior it wants from the public. As Peter Dorman writes in the comments

With so many objectives to pursue, if policy mainly took the form of bribery — excuse me, incentives — the state would be overwhelmed. It’s necessary to have negative incentives, taxes, as well as positive ones, feebate systems for instance.

The taxation-based complement of my market dirigisme is just Pigouvian taxation. Instead of purchasing from the citizenry the behavior the central government desires, the central government can penalize citizens who fail to behave as the central government prefers. That seems “cheaper”, but also meaner and more contentious. People generally don’t mind being offered an opportunity — “Hey! I’ll pay you if you do this thing. You don’t have to, but if it’s worth the money to you you can!” People object vociferously to, and organize politically against, state coercion that takes the form of “You should do this thing, and if you don’t we will punish and fine you.”

So it’s usually politically wise, I think, to prefer the former. Subsidize the behavior you want.

Revenue-motivated taxation should be broad-based and imposed gently on things mostly coded as good (like income). Pigouvian taxes, to be politically sustainable I think, require a strong consensus among the influence-weighted citizenry that the thing to be taxed is “bad”, that people, at an individual level, deserve to be punished or at least to compensate society for the behavior. Matt Yglesias has been talking up alcohol taxes, and that’s probably fine as a Pigouvian tax, because most of us have been persuaded at some level that drinking is a vice and even if we ourselves enjoy it responsibly, it’s fair that we should make some compensation to society for indulging. Gas taxes or carbon taxes are not fine. It is not a vice, at an individual level, for a person to drive to the grocery store or commute to work, even if they live far away. It’s not a vice for a person to live in an exurban or rural place where ordinary life requires long drives. On the contrary, many of us consider rural living an outright virtue. Yes, these choices have social costs, “externalities” in the language of Pigouish economists. But unless those social costs have been pervasively internalized as sin by the broad public (no, your own politically engaged friend group isn’t enough), Pigouvian taxation is “partial equilibrium“. A polity won’t allow large, enfranchised publics to be selectively penalized for behavior they think is fine. Michael Bloomberg can get a soda tax passed maybe in snobby elitist towns whose enfranchised publics look down paternalistically on frequent pop drinkers. But that’s pushing the limits. I’m all for a (refunded!) carbon tax, higher gas taxes, etc. I, um, voted for the proposed soda tax in San Francisco. But, realistically, it’s not a smart approach. You’re not going to save the planet by punishing large, influential blocks of citizens for behavior intrinsic to what they see as legitimate ways of living.

So, what about the expense? Are subsidies to encourage desirable changes by the citizenry affordable? Yes, absolutely. There are two broad points to make here. First, the real cost of such subsidies is lower than it appears. As always, we should be wary of a dollar-for-dollar accounting frame when considering the costs of public policy. Public expenditures are not alike in their effect on price stability, distribution, and other social desiderata. Secondly, to the degree that we are forced to ration net outlays, balancing conditional subsidies with broad-based taxes can be made equivalent to Pigouvian taxes fiscally, while retaining the benefits of relying on subsidy politically.

Subsides of citizen behavior are cheaper than they look for a bunch of reasons. Very narrowly, subsidies are not expenses at all, they are only transfers. They do not directly recruit or put pressure on real resources. To the degree the state is conditioning subsidies in order to “purchase” something from the public, that isn’t quite right, but usually the behavior that will be purchased displaces minimal alternative uses of real resources, or even increases the availability of such resources, making them negative expenditures in a sense.

Let’s unpack that. If the state hires people to build dense housing, that imposes a direct real-resource cost. People who otherwise would do different work are diverted to building these homes. Brick and timber and steel that otherwise would go elsewhere go here. In a broad sense, we can argue that the dense housing net-frees resources, because the people who move in might otherwise have lived in resource-costly exurbs. But that’s a complicated, very contestable, calculation. However, if the state subsidizes people who live in densifying neighborhoods, and the voters in some communities encourage construction they otherwise would have forbidden, very little of the recruitment of real resources should be attributed to the state. The people the state pays with its subsidy are not hired away from their old jobs or withdrawn from the labor market. The choices about which real resources will be recruited and deployed to the now popular densification will remain with the local governments, communities, and developers, displacing their own alternative uses. Mostly what will have happened is we’ll have (i) gotten the policy outcome we might have wanted but failed to achieve if we tried to induce local governments to change their laws despite the resistance of their citizenry; and (ii) made a very-broad based, rather than targeted, transfer to citizens of that community.

In distributional terms, broad based-transfers are often scored as “expensive” relative to counterfactual programs targeting the needy (although when the cost of attrition is taken into account, they shouldn’t be). But relative to ordinary expenditures, broad-based transfers are desirably progressive. When the government hires a contractor to do something, some of the funds may go to modest wage workers, but lots also go to well-paid professionals or flow through as capital income to business owners. None go to people who are neither investors or workers. Business revenue from government expenditures is distributed like market income generally. To the degree a more egalitarian distribution is desirable, broad-based subsidies are “cheaper” than ordinary expenditure in the sense that they incur less of the social cost that comes with making the rich richer.

Finally, on a per capita basis, broad-based subsidies intended to alter citizen preferences with respect to local governance can be cheap even in accounting terms. Most voters are not rich, a little bit of money can make a big difference relative to the costs and benefits they perceive from local policy and the convenience costs of voting. Often when you want to get something done, you have to purchase things from rich people who control access to scarce resources or capabilities, for whom it takes a lot of money to move the needle. But when the state wants to purchase changes in behavior or political preference from the citizenry, most people are very far from rich, and small amounts of money can go a long way. (The current vaccine lotteries are a great example. The per-person cost of the lotteries is pretty tiny, yet they have seem to be effective.)

However inexpensive subsidies are in the senses I’ve described, in some contexts and for some purposes, fiscal limits in an accounting sense will sometimes bind, politically or institutionally. These cases should be infrequent. Well-arranged governments don’t face purely financial constraints on socially valuable investments, just like firms in a well-arranged financial system can always issue securities to fund high NPV investments. But sometimes, pathologically, firms are subject to hard capital rationing, and sometimes governments may have to tax in order to subsidize. In these cases, you use the ordinary tax system to ensure you have the revenue you will need to purchase changes of behavior from the public, just like any other public expenditure. We have property taxes, income taxes, sales taxes. If we want to pay citizens of neighborhoods that tolerate densification and our expenditures are revenue constrained, we can raise those other taxes. The tax increases should not take the form of matched “pay-fors”. That’s a very bad style of public policy. But financially constrained governments should use the tax system to ensure the revenue they require for public purposes, including purchasing behavior from the general public.

A certain kind of wonk will object and say that this is really dumb. Why tax everybody and pay some people a subsidy when you could more “efficiently” impose the same net financial flows by levying a tax on the people who don’t do what you want?

This is a point I’ve made before and I suspect I will make again. There is social meaning, and political effect, in gross financial flows. An income-tax-financed UBI is not the same thing as a negative income tax even when the net financial effect of the two would be the same. Besides the stuff wonks will deign to recognize (like that paying first and taxing back later ensures more certain and prompt payment to those who will ultimately be entitled), different program forms create different social facts. A UBI informs the public in the straightforward language of cash that we are all together receiving a benefit, for which we are paying according to our means. A negative income tax shouts that the poor get a benefit for being poor that the rich must pay for. How the public understands a policy is part of the policy, inseparable from its effects on behavior, its political sustainability, and its ultimate effectiveness. Gross flows condition the meaning of a policy to the public, in addition to net outcomes.

Sure, increasing general taxes in part to pay for conditional subsidies to the public can be equivalent in net terms to just imposing a conditional tax. But imposing a conditional tax has the social meaning that the payer is being punished or asked to compensate for doing wrong, and is politically unsupportable when influential publics think the taxed behavior is legitimate or virtuous. Offering a subsidy communicates no such judgment. I don’t feel judged by the state for not driving a Tesla, even though had I purchased one, I’d probably have been eligible for some government cash. An offer of a subsidy is a market bid, an opportunity. You can take it or leave it, but the option is no injury. The general schedules of taxes on property, income, and sales are… schedules of taxes that apply broadly to everyone and carry no judgment about the lifestyles or choices of segments of the public. Combining those two elements, a general tax schedule and a lucrative offer, yields an entirely different social animal than a tax targeted and conditioned on behavior, even when from a high level you could argue the net financial flows would be similar.

This entry was posted on Thursday, June 3rd, 2021 at 11:45 am PDT.
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