The question is if you agree with where John Kerry would spend the money. I don't see any sign in his record and reputation that he would invest in anything with which ordinary people would agree. All you have to do is see pictures of him meeting with the Sandinistas in 1985 and participating in VVWAW in 1971 to see where he stands, philosophically. I would look more at what he has done, and less at what he says. There is too much truth in the assertion that John Kerry will say whatever he thinks his current audience wants to hear. That is the message I received from this last week. The entire DNC was aimed at putting out what the leadership thought was a viable message, not a message in which we could know that John Kerry actually believed. I suspect that you are one of those who's vote is driven by their bias towards a liberal position on social issues and who is turned off by the conservative (Southern) take on values and lifestyle. Given your background, I can understand that position.

Why would someone who is a McGovern Democrat give us anything but taxes and spending on PC items? Why would we trust him with the defense of our nation?

Posted by: Jim Bender at July 31, 2004 12:25 PM

Jim: All you have to do is see pictures of him meeting with the Sandinistas in 1985 and participating in VVWAW in 1971 to see where he stands, philosophically.

John Kerry has as much in common with a Communist as George W. Bush has in common with Hitler.

Posted by: Michael J. Totten at July 31, 2004 12:30 PM

Why the need to leave Bush's perspective unsaid?

His is that we spend where we think we have to and where we think we should spend, but we reduce tax rates to grow the economy; and that the economy growing will increase the revenue influx to pay for the spending.

Now, I would prefer him to cut spending and keep tax rates down, growing the economy, getting a huge surplus going, and enabling even more tax cuts, so his program is not all that I would like. But it is not irrational as Yglesias suggests, and while we have deficits now, I think only the most hard core of irrationalists do not admit that a large part of them were due to the economic hit we took on 9/11.

Posted by: Gerry at July 31, 2004 12:34 PM

Mr. Totten,

On your last reply, I do not think that is accurate. First, communists and Nazis have more in common than they have in difference, and further you would have to come up with some example of Bush arguing that the threat of fascism is overstated, or Bush arguing that we should not be working against people choosing fascism in South American nations, for the analogy to hold.

And you would need to have Bush writing a glowing introduction for a book of fascist poetry.

The claim that Kerry is a communist may be over the top, but part of that is his own doing by his own associations.

Posted by: Gerry at July 31, 2004 12:38 PM

Uh, Jim...I do believe the subject of this post was economics and not national security. You can raise all kinds of questions about Kerry's devotion to winning the War on Terror. I think that's an easy argument to make, really, because he's been all over the map. But on economics, as Michael was suggesting, only Kerry's philosophy is actually coherent. It's the liberal philosophy.

Bush, on the other hand, wants to spend like a liberal and cut taxes like a conservative. You can't do both. It's one of the very things I can't stand about the guy the most, not because he's spending or cutting persay, but because it's so effing dishonest and irresponsible. In essence, he tells us we can have our cake and eat it too at a time when that's the very last thing we need to be hearing. We have to fight a GLOBAL war. We have to adequately fund Homeland Security. We have to do something about the health care crisis in this country that's only getting worse and worse with every passing year. And we have to prepare for the collapse of Social Security, in one way or another.

I can at least respect Kerry for having a coherent solution: More taxes and more spending. Maybe it's not the one you agree with. That's fine. But it's a sign of maturity and sober thinking that Bush has yet to show us.

Posted by: Grant McEntire at July 31, 2004 12:42 PM

When did Kerry write a glowing introduction to Communist poetry?

I know Kerry is a big fan of Pablo Neruda, as am I. (Did he write an introduction to his work? I don't know. My question above is an honest one.) Anyway, Neruda didn't write "commie" poetry, he wrote love poetry. His politics are an entirely separate matter. I also love the work of Jorge Luis Borges, who described Argentina's right-wing military junta as "gentleman." I can do without the politics of either of those two writers, but their literary output is phenomenal.

I studied literature at university. You may not believe me, but we kept politics out of it. I still prefer it that way.

Posted by: Michael J. Totten at July 31, 2004 01:23 PM

Michael,

The economic case against George W. Bush is straightforward, and Matthew Yglesias nails it in three sentences.

"Kerry can be maddeningly vague at times, but in a broad sense one knows where he stands -- the government should..."

Correct me if I'm wrong, but you said the economic case (as in having to do with economics). Yglesias was referring to U.S. government fiscal policy.

Though somewhat related, economics and government fiscal policy are not all that closely correlated. Clearly, the economy is doing very well so what exactly did you mean that the economic case against GWB is straightforward?

Posted by: Kurt Brouwer at July 31, 2004 01:31 PM

Kurt: Though somewhat related, economics and government fiscal policy are not all that closely correlated

Yeah, okay. Point taken.

Posted by: Michael J. Totten at July 31, 2004 01:41 PM

Hi Michael et al.

You're missing one fundamental point that is fairly typical. Under ceteris paribus conditions, i.e. all things being equal, Bush would choose the second, that tax rates should go down and spending be adjusted. That was the point of his tax cuts.

However, there is that little thing of a war going on and the need to ensure that the world economy isn't going to tank. Europe and Japan are desperately dependent on exports to the US, and if the US economy slows significantly, the repercussions are stagnation and decline.

If anything, Bush is showing to be a supreme pragmatist, taking on debt during a period of difficulty, as any good Keynsian would recommend. He's doing it the right way: don't increase taxes, but rather absorb capital on the markets.

But then again, I'm an economist and hence biased towards the optimal utilisation of scarce resources. :-)

Best regards, glad you had a great trip.

John

Posted by: John F. Opie at July 31, 2004 01:54 PM

"Bush, on the other hand, wants to spend like a liberal and cut taxes like a conservative."

Isn't this just what Reagan did?

Also, from what I've read the huge deficit is largely because of the massive reduction in wealth the wealthy suffered when the bubble burst in 2000. In other words, some deficit was inevitable.

I agree about his spending though. The Medicare drug bill causes flames to shoot from my head. I'd absolutely back a Medicare drug bill for those elderly who are poor but not for all elderly. The elderly are now the wealthiest sector of the population. Why do we spend so much money on the wealthiest people? I've no problem with doubling SS checks and free drugs for those elderly who are poor, but, yeah, I've got a problem with giving free money and care to those elderly who own Mercedes.

Posted by: lindenen at July 31, 2004 01:56 PM

"When did Kerry write a glowing introduction to Communist poetry?"

Slight difference, I said a glowing introduction to a book of, which is slightly different (but not substantially).

The basis for my comment was the fact that Kerry has written the preface for this collection of works by Langston Hughes, who was a poet, but one who did not keep politics out of it. His poetry, particularly early in his career, was essentially Stalinist propaganda. His poem "Let America Be America Again" has had its title appropriated by Kerry for his campaign slogan; the poem was written originally for a pamphlet titled "A New Song" for the International Worker Order, which was Stalinist. This is the keystone piece in the collection of works Kerry prefaced. The pamphlet also contained his "Goodbye Christ", which contained yearnings such as "Goodbye,
Christ Jesus Lord God Jehova,
Beat it on away from here now.
Make way for a new guy with no religion at all—
A real guy named
Marx Communist Lenin Peasant Stalin Worker ME—
I said, ME!"

So if my phrasing was poor, it was out of trying for brevity. You don't find Bush writing prefaces for fascist poets, or for poets who were at one time fascist, or writing prefaces for books containing as their centerpiece a fascist poem, or adopting as a campaign slogan words from a decidedly pro-fascist poem.

It is an overused and poisonous political tactic to call your opponent a commie or a fascist. However, with Kerry, one of two things is true. With his dalliances with being supportive of the political goals of the Viet Cong during his anti-Vietnam war days, and with his saying that we needed to get over our fear of the communist system, and with his opposing our efforts to stop the spread of communism in South America in the 1980s, and with his strange flirtation with the poetry of Langston Hughes, he either has some communist sympathies, or he wants those on the far left to think he does so they will vote for him.

Posted by: Gerry at July 31, 2004 01:59 PM

The fallacy is that many of the "problems' the government spends money on to solve never get solved but the government agency established to deal with the problem and the spending, especially for administrative overhead, continue to grow, with tax rates spiraling commensurate. Working over 20 years in the federal government has made a skeptic and quasi-libertarian out of me. MY (a nice Jewish Cuban boy, educated at Harvard, with a broad theoretical grasp of the world) believes in delivering more government services to more people and in government tackling more problems, a belief to which he's entitled, but I've come to believe it's flat out wrong and in the long run corrosive both of the economy, the efficacy of government, and the poor schlubs who are the putative recipients of government assistance. MY reminds of those 20-something Ivy Leagued Congressional aids, who arrogantly and pompously lecture senior civil servants 30 years their senior, who out of deference to "Congressional oversight" have to put up with their crap.

Posted by: RayZacek at July 31, 2004 02:06 PM

Gerry,

"Let America be America again" is a fantastic piece of work and there is no shame in saying so. Not everything by Hughes is so hot, but I'm not going to beat up on Kerry over this. I'd have to shun most of the English Department at my old university if I were to go there, and that's just not going to happen.

As far as fascist poets go, Ezra Pound was one, and a Jewish professor of mine once told me Pound was his favorite poet. He found that troubling, which is the reason he mentioned it in the first place, but art is a funny thing and different rules apply for those who love it.

Besides, there are some Marxists worth reading. (Sue me.)

Here's a very short and kinda related piece by Uruguayan writer Eduardo Galeano that you might like despite the man's far-left but still democratic politics. This is from "The Book of Embraces" one of my favorite books ever written by anyone.

It was half a century since the death of Cesar Vallejo, and there were celebrations. In Spain, Julio Velez organized lectures, seminars, memorial publications and an exhibition offering images of the poet, his land, his time and his people.

But then Julio Velez met Jose Manuel Castanon, and all homage seemed insignificant.

Jose Maneul Castanon had been a captain in the Spanish War. Fighting for Franco, he had lost a hand and won various medals.

One night, shortly after the war, the captain accidentally came upon a banned book. He took a look, he read one line, he read another, and he could no longer tear himself away. Captain Castanon, hero of the victorious army, sat up all night, captivated, reading and rereading Cesar Vallejo, poet of the defeated. Next morning he resigned from the army and refused to take a single peseta more from the Franco government.

Later, they put him in jail, and he went into exile.

That piece is called "The Function of the Reader." Note that Mr. Galeano does not say Captain Castanon ever became a socialist or any other kind of leftist.

Posted by: Michael J. Totten at July 31, 2004 02:42 PM

All good points and valid defenses as to why it is not a good line of attack against Kerry.

But my point was why the analogy of Bush and fascists is not a good one. There are, with Kerry, a handful of associations that are consistent with someone playing footsie with those who are communist. If he's doing this for votes, or out of conviction, I do not know. My only point was that the analogy you threw out does not fit because there is no equivalence to this aspect of Kerry with Bush.

The main point I wanted to make on this comment thread was about Bush's economics anyway. It is what he was saying when he said he wants to "grow the pie". If the pie is bigger, than a piece that is a smaller percentage of the pie can still satisfy our spending appetites.

I'd rather us go on a diet though.

Posted by: Gerry at July 31, 2004 02:53 PM

MT,

That is one of the better cases against W without a doubt. I think the best case is one that focuses soleley on out of control spending, as the tax cuts clearly helped us generate rapid economic growth coming out of the recession beginning in March 2001. The deficit will be lower than the $521 billion originally projected.

What the Y-guy leaves out of the equation is where on the priority scale the deficit should lay.

For me the top priorities in evaluating the candidates are:

1. Willingness to aggressively kill Islamic terrorists using all appropriate means;

2. Willingness to pursue regime change in Iran, Syria, the Palestinian Authority and over time Saudi Arabia.

3. Willingness to "go it alone" if necessary to accomplish 1 and 2;

4. Protection of civil liberties at home (screw homeland defense, seek the bad guys out in their swamps and kill them there, don't fight here, fight there!);

5. Government policies which will promote rapid economic growth;

6. Minimize taxes so as to promote individual liberty;

7. Balanced budget.

I haven't included everything, but you get my drift. Y-guy makes a good case, but only on my 7th priority.

Posted by: spc67 at July 31, 2004 03:30 PM

Michael J. Totten - regarding Kerry and the democrats and the communists, peruse the following points:

1. Bush is destroying workers rights and outsourcing jobs instead of protecting the right to organize and creating new jobs rebuilding schools, bridges, roads and hospitals

2. Bush is privatizing Medicare, Social Security and public education with phony reforms instead of enacting health care for all, protecting retirement funds and full funding for public education through college.

3. Bush is bankrupting the Federal Government with giant tax cuts for the very rich and super-funds to the military instead of securing the budget for human needs by taxing the rich and spending on human needs.

4. Bush is rolling back civil rights gains instead of enforcing and expanding affirmative action to end racism in all areas of life.

5. Bush is curtailing women's rights and choice by undermining Roe v. Wade instead of upholding the right to choice and ending the gender wage gap.

6. Bush is abusing immigrant workers in low-wage jobs instead of providing a clear path to citizenship and equal rights.

7. Bush is exploiting and ruining the environment by protecting corporate polluters instead of conserving our natural resources for the public good.

8. Bush's war in Iraq is a disaster for our security and economy. He is pushing for more preemptive wars and for first strike nuclear military policy instead of negotiations and cooperation utilizing the UN.

9. Bush is denying civil liberties and free speech in the name of fighting terrorism instead of repealing the USA Patriot Act and helping cities, towns and states fund firefighters and police.

10. Bush discriminates against Gays and Lesbians with a Constitutional Amendment instead of expanding civil rights and liberties for all.

Many (if not most) of these points are ones that Kerry and/or the democrats expound upon and support. Just one problem, this was taken from USA Communist Party web site. Doubt me, here is the link: http://www.cpusa.org/article/articleview/585/1/3/

To me, that in itself, speaks volumes about both Kerry and the democrats.

Posted by: mike from oregon at July 31, 2004 03:40 PM

Mike from Oregon: Just one problem, this was taken from USA Communist Party web site.

I couldn't give a shit less what the CPUSA says. This is an old story, ultraleftists pretending to be liberals so they can look "moderate." That doesn't say anything about Kerry and the Democrats at all.

Come on. I'm not going to argue about this anymore. Did my comments section become the inverse of the Bush=Hitler crowd all of a sudden?

Posted by: Michael J. Totten at July 31, 2004 03:53 PM

Michael, the Langston Hughes guilt by association effort reminds me of post you made on your old blogspot blog when Romesh Ponnouru responded thusly to Kerry's acknowledgement that his favorite poet was Pablo Neruda:

It figures that his favorite poet would be a Commie.

Your words were most eloquent then:

To place an ideological litmus test on poets, to shame a writer's admirers because of the dead man’s politics, is to politicize literature as totalitarians do.

Mr. Ponnuru, Pablo Neruda wrote love poems. He wrote odes to this, and odes to that, even an ode to salt. He won the Nobel Prize for Literature. So he's John Kerry's favorite poet. What does that say about Kerry? It says he has good taste.

Conservatives wonder why the left says they act like Joseph McCarthy. Well, there you go. We’re called socialists and communists for every little thing. Pick up a book of love poems and the next thing you know you’re mugged and libeled by the GOP.

Neruda was a communist and Borges was some kind of fascist. But they were also men, they were also artists. I cherish them both.

Neruda is dead. Borges is dead. Their politics are dead. The work they left behind is alive.

I couldn't agree more. Here's another contradiction along the lines of Borges and Neruda: I like Garcia Lorca's poetry and dramas. I also happen to like Camilo Jose Cela's fiction. Garcia Lorca was murdered by Franco's fascists, Cela was a Franco admirer who served in Franco's rebellious army during the Spanish Civil War (although he later rejected Franco).

Posted by: Randy Paul at July 31, 2004 04:29 PM

In comparison with the WoT, the deficit is a trivial issue. Moreover, it's extremely difficult to obtain a truly accurate picture of the deficit, since government accounting practices leave a lot to be desired (e.g., phony trust funds) and since revenues are so heavily dependent on the state of the economy. In any event, the only way that it even makes sense to look at the deficit is in terms of the size of the economy, and here the current deficit is well within acceptable (and historical) limits.

From an economic perspective, it is questionable whether a surplus is even desirable. Government revenues are taxes. Taxes are funds the government takes from individuals or entities that those individuals and entities cannot spend on purchasing goods and services. When government runs a surplus, it is taking more money from the economy than it needs to take. That extra money is then used to retire government bonds (which are marketable securities - i.e., cash equivalents). Retiring government bonds with tax money has the effect of reducing the money supply, and thus reduces economic growth.

The single most important thing either candidate could do to reduce the deficit is to support policies that contribute to economic growth: Here, Bush beats Kerry by a mile, since low taxes and fewer transfer payments are better for growth. If you want to support the candidate who is likely to do the most for the economy, you should support the candidate who will do the most for economic growth -- Bush.

Posted by: Ben at July 31, 2004 04:53 PM

Michael,

You are one of my favorite liberal bloggers, along with Daniel Drezner and Glenn Reynolds. I wouldn't have said that everyone was liberal until recently, when we learned about how they were considering voting. I am sorry to say that where John Kerry is concerned, I think and feel something like you think and feel about President Bush.

The intent was not to be saying bad things in your comments section, just for the sake of doing it, but rather to (rather poorly, perhaps) argue against the merits of John Kerry and his various policy positions. My problem is primarily that I don't feel like we are getting the straight scoop from John Kerry. He is telling us what he thinks you and Dan Drezner (and our friend, Andrew Sullivan) want to hear. I am not sure how well John Kerry has succeeded, but he has done well enough that you are on board.

I enjoyed your trip report and am glad your travels were safe.

Posted by: Jim Bender at July 31, 2004 05:49 PM

Jim, I'm not on board with either Kerry or Bush at this point. I know Reynolds isn't either. I haven't checked out Drezner since I got back, though, so I can't say.

There's lots to complain about re Kerry. I'm just trying to keep the criticism honest.

Posted by: Michael J. Totten at July 31, 2004 06:12 PM

"Facts about the tax cuts from Treasury Secretary John Snow:

• The richest 1 percent of Americans used to pay 30.5 percent of individual income taxes. But after Bush's tax cuts, they now pay 32.3 percent.

• The bottom 50 percent used to pay 4.1 percent of all individual income taxes. They now pay 3.6 percent.

The tax cuts, Snow points out, not only reduced taxes for every American — giving the U.S. its fastest rate of economic growth in nearly 20 years — but it actually shifted the tax burden slightly more toward the richest people in the country."

Here's an article I found.

Posted by: lindenen at July 31, 2004 06:35 PM

Lindenen, that looks like some serious stat-twisting to me. I need something better than a "he said" twice-removed. Something like the actual data. How can the wealthy get a larger tax cut and also shoulder a larger chunk of the burden?

Posted by: Michael J. Totten at July 31, 2004 06:55 PM

Revenue this year is on track to exceed 1800 (If my math is correct) billion. Tax revenue for last year was 1726 billion. http://www.fms.treas.gov/mts/mts0604.pdf
Looks like tax cuts might cause revenue to rise.

When is the last time spending decreased during a war or conflict?

Raising taxes in to stimulate a shit economy and cutting spending during wartime. When has that ever worked?

Posted by: mnm at July 31, 2004 07:18 PM

Mnm: Raising taxes in to stimulate a shit economy and cutting spending during wartime.

Freezing tax cuts on only 2 percent of the country that haven't even gone into effect yet hardly counts as "raising taxes."

Posted by: Michael J. Totten at July 31, 2004 07:42 PM

The issues brought up in this article are worth taking a look at.

Posted by: Randy Paul at July 31, 2004 08:00 PM

How can the wealthy get a larger tax cut and also shoulder a larger chunk of the burden?

That's easy. The tax cut is a cut in the marginal percentage. But if the wealthy benefit disproportionately from economic growth, then the absolute dollars they are taxed go up.

Here's a quick example. If under prior tax laws Bill Gates earned taxable income of $10 million and paid a 40% rate? then he paid taxes of $4 million. Say he gets a tax cut to 30%. But due to economic growth his income goes up to $15 million. Then he pays $4.5 million in taxes.

If everyone else stays the same? The Gates share of the tax burden has gone up.

Posted by: spc67 at July 31, 2004 08:19 PM

Cutting taxes a modest amount actually raises government revenues, especially in the medium and long term. Lower taxes increases economic activity and growth rate, reduces tax avoidance strategies (loopholes) in favor of more productive behavior, and reduces the incentive to cheat on taxes and the non-reporting of income.

This is basic economics, but something today's Democratic party is apparently incapable of understanding or at least admitting. Let's face it -- the Democrats want to keep people dependent on government because people dependent on Social Security payments, welfare, public-sector unions, etc. can usually be counted on to vote Democrat. Turning social security into an investment-based program like a 401K would free millions of people from the bondage of a government handout and seriously erode their base. But imagine the results -- a 65 year old McDonalds worker retiring with a million dollars in the bank! This is what we should be doing with the social security witholding tax. Letting workers build up their own accounts and building wealth for themselves and their children. Instead of the brain-damaged Ponzi scheme it is today.

Posted by: Matthew Cromer at July 31, 2004 08:21 PM

Doesn't that always happen though? Cut taxes on the wealthy and they actually pay more? Iirc Reagan cut the Marginal Tax Rate to 30%, Clinton raised it and currently it's 35%. Also, I know I've read that during the 80s when we developed that huge budget deficit the government was actually taking in more money than it was before it cut taxes. This article on what's called the Laffer Curve should explain some of this. I'm not an economist or an expert so someone else should be able to explain it better.

This link from instapundit.com claims that the rich got poorer and the middle class got richer, which is odd to me and I do not totally understand it.

Posted by: lindenen at July 31, 2004 08:44 PM

First, the top 1% are rich enough to hire accounts to minimize their taxes. No matter what you do to the tax codes, they will find ways to minimize their taxes. For example, we know Teresa Hienz Kerry according to the "summary," she paid income taxes of about $750,000 on an income of $5.1 million. That's about a 15% of income for federal taxes. Probably no social Security and Medicade either. My wife and myself paid about 17% of total income as federal taxes plus another 6% SS and Medicare and made significantly less than her. She's in the top 1% and we are not.

See http://nypost.com/postopinion/opedcolumnists/20819.htm

The econopundit actually found they got less by percentage than the middle classes. See http://www.econopundit.com/archive/2004_07_01_econopundit_archive.html#109120696357630090

Much of the problems you are having with the tax analysis are because you are thinking in constant terms. You are assuming a zero sum game. Since the economy grows every year, you need to figure everything as part of the whole. When I hear record deficits, I don't know what that means because we also have record GNP. When you hear record profits, it doesn't mean anything because if you are staying even in market share you have to make more each year.

There are a couple of reasons why the rich are paying more. One, with less incentive to hide money to avoid taxes, they tend to make investments based on return and growth not percentage of income hidden. More investment, less bonds. Only the very rich can afford to make these trades. More return, more income, more growth, more taxes. In Carter's ime I knew guys making $100K (assume $200K now) trading very sub optimal investments with high tax shelter ramifications. Investing in wind power was big. When Reagan lowered the top brackets, the questions changed from how to hide money from taxes to what has the best return.

Because "less" relative taxes were collected, and because (as shown by the econpudit) it had less effect on the top earners, the rich paid a greater share. Also because everyone became a "little" richer, the economy grew by 3% and the government got more.

Posted by: OldManRick at July 31, 2004 08:58 PM

Matthew: Cutting taxes a modest amount actually raises government revenues, especially in the medium and long term.

There's a point where this can't be true any longer. If you kept this up, eventually taxes would be reduced to one percent, yet revenues would be bigger than ever, according to the theory. Yet this strikes me as evident nonsense, since everyone would have to be a millionaire, adjusted for inflation, for this to be true.

So where's the cutoff point? When are taxes so low that the government just starts to starve?

Another reason I don't buy it is because if it were true we could just keep cutting taxes and keep ramping up spending and there would never be any deficit. There would be no reason at all for any kind of fiscal responsibility whatsoever. We could just cut taxes and spend more money forever. I think we all know, when we're not in the throes of cognitive dissonance, that it doesn't work that way.

Posted by: Michael J. Totten at July 31, 2004 09:54 PM

Michael, did you read the links on the Laffer Curve? I feel that they answered some of your questions.

Posted by: lindenen at July 31, 2004 10:26 PM

Michael,

I suspect that income tax levels of about 20% maximum would eventually maximize revenue. At that level the distortion effect on the economy is low enough. The current maximum rate of 36% could easily be lowered and would pay for itself in increased economic growth in a couple years.

Personally I would not like to see revenue maximized. I consider most government either inefficient or an actual disutility and would prefer to see a lot less of it. For starters, the ridiculous and absurd war against allowing people to decide which chemicals they consume.

Posted by: Matthew Cromer at July 31, 2004 11:09 PM

Sigh. Supply-Side Economics. What a crock.

Look. There are and have been certain situations in which the theory holds true. When Sweeden, for instance, once had an average tax rate of about 80 percent. Cutting taxes in an extreme scenario like that is actually a good idea, both in terms of not paying way too much in taxes and in terms of revenue coming in to the government. But you supply-siders take this crap way way too far.

I'd say once you start getting too far above a federal income tax rate of 50%, then we can talk. Otherwise, get real buddy. America is not Sweeden. In the meantime, I'll be advocating higher tax rates (at least higher than the ones we have now) in order that we actually start making some progress on domestic issues and have enough left over to meet our global responsibilities in the War on Terror.

What we badly need in this country today is a Cold-War-type liberal in a position of power with the balls to level this with the American people: That, yes, because of the War on Terror and the collapse of Social Security and 45 million people with no health coverage and the new costs of Homeland Security, taxes have just got to go up. That's responsible government, not some supply-side excuse for justifying "have your cake and eat it too" policies.

Posted by: Grant McEntire at July 31, 2004 11:25 PM

Grant,

It's the "Great Society" and New Deal programs that are a crock. Of course social security is collapsing -- like all Ponzi schemes collapse. It's nothing more than a weird form of welfare for old people instead of an investment program as it was sold. And just look at what we did to the poor African Americans in this country by paying women to get pregnant and have babies out of wedlock. If the dad was around and contributing, no money, but if he was out of the picture Mr. Government would provide a paycheck. Brilliant! And we can lay a great deal of the blame for the black underclass on that factor.

The other crock is thinking you are going to squeeze more revenue by raising taxes. You raise them any more and your growth rate will shrink to European levels. That will mean no additional net revenues.

The fact that our economy grows fast with low unemployment and Europe grows slowly with high unemployment is clear evidence that supply side economics works and highly socialized economies do not.

Health care may be expensive in this country, but at least you can get it (even if you are a street person). National health care is a disaster -- substandard care, rationing, six month waits, and streeting people with serious acute medical conditions in order to control costs. Anyone who actually wants quality, timely treatment in a socialized medicine country has to hire a private doctor for cash or for a private insurance policy. While here there are free or very low cost public health departments, charitable hospitals, and emergency rooms where even the homeless can get medical attention. Sometime "progress" ain't.

The bottom line is, in the world outside of government, good ideas that work well prove themselves and spread. Bad ideas and wasteful institutions fail. With government, there is no natural discipline. Programs almost never go away, regardless of how much they fail. Often failure means more money next year, to "help fix the problem". And there is always a vested interest in maintaining the program once established (the bureaucrats who work for the program, and the outside beneficiaries of the program), so government always tends to increase over time.

Posted by: Matthew Cromer at July 31, 2004 11:57 PM

Matthew, Cuba has a "highly socialized economy." For a while there Libya nationalized corner grocery stores. That was another "highly socialized economy" for you.

Remember, it was Eastern Europe that wallowed in socialism, while Western Europe was capitalist just like the U.S. Now all of Europe is capitalist. Sure, some of the left-wing parties still call themselves "socialist," but that's for brand-name recognition purposes, not because those parties are actually socialist.

Socialism is dead outside of a few bankrupt lunacracies. Fidel still says "socialismo or muerte!" Well, he got his wish. Cuba's economy might as well be toe-tagged.

No serious person argues for socialism any more, especially not in this country. So it makes little sense to argue against it unless you're brave enough to wade into the Indymedia fever swamp.

Posted by: Michael J. Totten at August 1, 2004 12:14 AM

Michael, you wrote:

'Lindenen, that looks like some serious stat-twisting to me. I need something better than a "he said" twice-removed. Something like the actual data. How can the wealthy get a larger tax cut and also shoulder a larger chunk of the burden?'

Here is an article from FoxNews based on US Treasury data that explains the issue quite well. Essentially, your belief that the wealthy got a larger tax cut is false (assuming one measures in percentages, not dollars).

[Fox News Monday, June 07, 2004-Gail Buckner, CFP]
... The tax cuts we received in 2001 and 2003 shifted an even larger share of the income tax burden to those with higher incomes....How can this be, you ask, when the top tax rate was reduced from 39.6 percent to 35 percent? (An 11.6 percent tax cut.)

Simple. Income tax rates at the lowest end of the scale were reduced by a much greater extent. For once thing, we replaced the 15-percent bracket with a 10-percent bracket for the first $14,000 in taxable income for a married couple (that's the 2003 figure, this goes up to $14,300 for 2004).** That's a one-third reduction (33 percent). So, for this tax year, instead of owing $2,145 on their first $14,300 of income, a couple will now pay $1,430.

Because lower-income individuals are paying a smaller piece of the total tax revenue pie, the portion paid by those with higher income must, by definition, go UP.

It will be a couple of years before 2002 and 2003 income tax data are in a form that can be analyzed. Nevertheless, the Treasury Department estimates that this year the portion of tax paid by those with higher incomes will increase again. That's because tax provisions such as marriage penalty relief have a bigger impact on taxpayers with lower incomes. In addition, some tax breaks phase out once your income hits a certain level. Those with higher incomes see no benefit at all from, for instance, the increased child tax credit.

When they crunch the actual numbers for 2004, the folks at Treasury predict the average tax rate for the bottom 50 percent of all taxpayers will fall by 16 percent, compared to a 12 percent decline for those in the top 1 percent of income....

http://www.foxnews.com/story/0,2933,121811,00.html

Posted by: Kurt Brouwer at August 1, 2004 12:56 AM

Michael,

Sounds like you do not like the word "Socialist" used in this context. Fine. I'll call the majority of Western European countries sclerotic, overregulated, overtaxed, poorly-performing mixed economies. The worst offenders are the Scandinavian countries, France, and Germany.

In any event, people who want higher taxes, more social spending, and more regulation in America are asking for that level of unemployment and economic growth. Not something I find appealing.

Posted by: Matthew Cromer at August 1, 2004 07:56 AM

Kerry......knows where he stands.... "the government should spend more money in a variety of areas in order to try and solve various problems".

It seems like no one on this thread has questioned the underlying validity of Yglesias' assumption.

Please, someone show me where government (any government) has shown any consistently greater insight in how to "invest" in "problems" than the private sector.
Maybe Yglesias and Totten don't understand this but if this is Kerry's position it is clearly a socialist position i.e. the government knows better how to "invest" money to "solve" problems.
Notwithstanding Totten's claim that socialism is dead, anyone who says that government is better at spending money to "solve problems" is endorsing socialism whether they know it or not.

Is Kerry a socialist? I agree with Yglesias; since he always votes to increase government spending to "solve" social problems and rarely supports legislation that encourages individuals to handle their own affairs (school choice, medical savings accounts and privatizing social security) there is no other way to conclude that Kerry is not socialist at heart.

Posted by: JAG at August 1, 2004 08:04 AM

Let’s see in one year alone the government, thought deficit spending, dumped close to a half a trillion dollars into the economy vs a few billion dollars in tax cuts, yet some posters on this board seem to want to attribute 100% of the economic gains to the tax cuts. Huh?

Hell, in a very broad sense the tax cut didn’t even fund the deficit. The government borrowed money to give out what people are charmingly referring to as a tax cut only to borrow it right back in order to cover the revenue shortfall. I would suggest that it is more likely that any economic gains are due more to the deficit spending then to the tax cuts because the deficit spending was several orders of magnitude larger. But that’s just me.

Posted by: Rick DeMent at August 1, 2004 08:24 AM

After reading some well-thought arguments on this thread, Bush's economic policies are helping to extend prosperity among the middle class, I see read their premises as being beneficial to all.

Good economic policy, such as Bush's policy, will expand middle income wealth. It seems to me this expansion will affect lower income in a good way.

Actually, I was once considered lower income but because of Reagan economic, which I believe Bush has incorporated into his economic policy, I have now expanded into middle income wealth.

From what I have experienced, expanding middle income wealth is good economics, as it helps to increase lower income wealth into middle income wealth. Middle income wealth expands into upper income wealth.

I suppose this is why individual prosperity continues to grow in America while individual prosperity outside America is either stagnant or declining.

I am voting for Bush, seems to me his economic policies are a benefit to economic expansion.

Posted by: syn at August 1, 2004 09:02 AM

People who try to explain the Laffer Curve almost always get it wrong. They'd do better to just give the links.

I remember when I was 13, and driving. (I was the last 13-year-old in my county to get a learner's permit before they changed the age to 14.) At one point my cousin and I were driving and noticed the gas tank was on empty. We had to get to a gas station quick. We talked it over and agreed that the car uses less gas when it goes slower. So we started heading toward the gas station at three miles an hour.

Pretty quick there was a line of honking cars behind us and I wanted to tell them we had to go slow so we wouldn't run out of gas. But then my cousin had another idea. He said, if we get farther on the same gas when we go slower, wouldn't we get the farthest if we just stayed in one place with the motor running?

That night I asked my Dad what speed the old Ford got the farthest for the same amount of gas, and he said its best mileage was at about 55 mph. Oops.

I'm not a professional economist, and there are a lot of other important factors like deficits, but from what I've seen, other things equal, when they try to boil it down to just tax rate and its effect on the economy, the government collects the most taxes at a rate around 45-50%.

Posted by: J Thomas at August 1, 2004 09:19 AM

I'm not sure it matters a whole lot what the american government's economic policy is. Too much of the american economy is controlled by china.

China has been selling to us cheap and pocketing the money, and now they have trillions of dollars. By american economic theory this is stupid of them. The result is there is less wealth to go around, and they have less of what there is.

They sold us flyswatters and woven baskets and, well, pretty much anything you can buy at Walmart. And in return they bought factories and patents, and when they didn't see capital investment they wanted, they just kept the money. They could have bought california wine and oregon redwood. They could have bought american video games and american management seminars. They could have bought american grain to make beer for their citizens. Instead they sat on the money, and their people who worked so hard for such low wages got very little. They outcompeted everybody.

So now we can devalue the dollar and the chinese investment in dollars will be worthless. Or they can devalue the dollar. We can choose to keep interest rates low, or if we want to raise rates they can loan money at low rates. They have the renminbi pegged to the dollar -- which means in practice that the dollar is pegged to the renminbi. We don't the choice of unpegging it.

When it comes to buying international oil (and more than 60% of our oil is imported these days) we can bid for oil with dollars and so can china. If they choose to outbid us there isn't much we can do about it -- legally.

At any time they could unpeg the renminbi. The dollar falls, WalMart prices go real high. Oil prices go real high. Our products become much more competitive overseas, suddenly we can compete with china on price for the things we and they both export. Provided we can get the resources to produce stuff to export.

About all we could do about it is blockade china and redirect oil tankers to the USA. This is why they're getting oil pipelines from russia....

Neither party has anything to gain by explaining this. It makes us look bad. And it isn't clear what to do. If we put tariffs on chinese stuff to slow the rate the problem gets worse, they wouldn't like it.

Posted by: J Thomas at August 1, 2004 09:37 AM

Thomas,

The overall tax rate in America is approximately 40%, counting all taxes at city, county, state, and federal levels.

Also, are you talking about maximizing revenues the first year, or over time? Because the tax rate that maximizes revenues this year will reduce revenues over the long haul by stifling growth.

Posted by: Matthew Cromer at August 1, 2004 09:40 AM

JAG: there is no other way to conclude that Kerry is not socialist at heart.

This "socialism" thing annoys me, as you can see. However, if you'll agree with Paul Berman's definition of "socialism" then I'll just go ahead and agree with you.

Paraphrased: Socialism in the West has finally become what it should have been all along; an ethical orientation rather than an economic how-to manual.

I have a "socialist" (using Berman's revised definition) ethical orientation. Most Democrats do. So, sure, Kerry is a "socialist" at heart. But he's also a capitalist like the rest of us. So is the free-trading pro-outsourcing Matthew Yglesias whom I linked to.

Posted by: Michael J. Totten at August 1, 2004 10:54 AM

Actually, Matthew, I believe it is closer to 45% when you count all federal, state and local taxes and "fees" (taxes by another name).

Posted by: Ben at August 1, 2004 12:59 PM

MJT,

Someday I hope you sit down and square the circle of socialism = freedom. Even Berman at his best (and he is very good) can't convince me that I should empower anyone to take from me (by threat of force) the means for survival (money) in order to provide a "solution" to a problem that I had no part in generating.

Beyond taxes, I "give to the needy" on a regular basis at a rate that reduces my need to respond to the threat of force.

If you can provide an argument that any government at any time in history has actually "solved" a societal problem through forced allocation of resources, I will listen respectfully. Solve does mean that the problem no longer exists. Otherwise, you would be simply proposing an additional restriction on my freedom because you trust a nameless, faceless bureaucracy more than you trust me. Just because the bureaucracy has a stated "purpose" does not mean that it is achieving that purpose.

Society is slightly more complicated than the simplistic idiocy of socialism can ever admit to.

Posted by: Rick Ballard at August 1, 2004 01:27 PM

Rick, you wrote that post as if the Republicans are offering you the option of zero taxes. The fact that they are not is my rebuttal. You're going to have money taken from you backed with the threat of force everywhere in the modern world no matter which country you're living in and no matter which political party is running the place.

Unless you're richer than 98 percent of Americans, John Kerry says he does not intend to raise your taxes. If he reneges on that promise, we'll talk. Maybe such a change would be necessary, and maybe it would not be necessary. It depends.

Posted by: Michael J. Totten at August 1, 2004 01:34 PM

Rick: Society is slightly more complicated than the simplistic idiocy of socialism can ever admit to.

Also, as I mentioned to Matthew above, you're preaching to the converted when you make this statement in America unless you're over at Indymedia. No one is arguing for socialism. K?

Paul Berman, whom you said you partly admire, recently wrote in Dissent magazine that we need a new "socialism" to replace all the failed socialisms of the past. He's talking about finding new ways to apply a "socialist" ethical system without being an idiot. I would appreciate it if conservative intellectuals would sit up and take notice that when it comes to economics, seriously liberal intellectuals are a lot smarter and more up-to-date than generally acknowledged.

Posted by: Michael J. Totten at August 1, 2004 01:38 PM

MJT,

I don't partly admire Berman, I greatly admire him. He epitomizes the the best on the socialist side. I also apologize for using "idiocy", ignorance would have served. I have very, very little antipathy towards liberalism's ends but I cannot stress how antithetical I find the means. If you want something then charge an accountable entity with its production. The liberal viewpoint simply falls to a shambles when it considers that offering a profit for the performance of a specific task will yield a higher benefit (overall) than assigning some bureaucratic clone to achieve the task required.

Berman still does not recognize the benefit of a profit motive in selecting the best means for achieving the desired ends. I don't see a recognition of abandoning the 100% target either. That is a rather explicit statement of utopianism. We ain't going to get there. The problem with Benthamist utilitarianism is that it never, ever quantifies satisfactory results. Social engineering has nothing to do with structural engineering. There exists a measurable percentage of individuals who cannot be "helped". Quantifying that percentage would aid the overall acceptance of the concepts entailed in a "socialist" ethical system.

If perfection is the ideal then failure is the outcome.

BTW - I do consider you one of the sharper knives in the drawer on the left and I reiterate my apologies for "idiocy". It is a source of great frustration for me to see the "perfect" rob the possible.

Posted by: Rick Ballard at August 1, 2004 02:34 PM

Rick,

Here's the piece by Paul Berman in Dissent that I mentioned where he asks for a new socialism to replace the several failed socialisms of the past. Great stuff from him, as always.

Posted by: Michael J. Totten at August 1, 2004 05:24 PM

MJT, this thread was all over the map. I LOVED IT. GOOD WRITING, EVERYONE! Makes ya think and that is the whole idea.

George

Posted by: GMRoper at August 1, 2004 05:26 PM

The problem with getting things done by assigning profit for doing them is that it's so easy to get unintended side effects.

My background in evolution gives me metaphors for this. Like, a very long time ago a swedish farmer tried to improve his wheat. Each year he planted the biggest wheat kernels. In only six generations he had a strain of wheat that had four giant wheat kernels on each plant. Yield in bushels per acre was way down.

Antibiotics are notorious for producing antibiotic-resistant bacteria, and insecticides produce insecticide-resistant insects. At one point they were using cyanide to kill citrus scale insects on orange trees in california. They'd put a big bag over the tree and pump it full of cyanide. Nothing that needs oxygen is resistant to cyanide. But they started to find cyanide-resistant scale insects. When they studied the mutant insects they found that these insects would sit very still and hold their breaths for half an hour or more whenever they got scared.

There are of course lots and lots of examples of people finding ways to make a profit by subverting systems that were designed to give them profits for doing right.

Of course similar problems come with bureaucracies too. Getting desired results from complex systems is not yet a science.

Posted by: J Thomas at August 1, 2004 05:59 PM

Matthew Cromer, I can't tell you much about the estimate that the optimum tax rate (in terms of maximising tax revenue) is 45-50%. I am not a professional economist myself, but a professional economist told it to me at a party. From what I'd read by Laffer, I figured a guy at a party had roughly the same credibility.

Posted by: J Thomas at August 1, 2004 06:05 PM

MJT,

Berman's piece is very good. He observes and identifies many "wrong" situations. He does not identify a solution nor does he identify the fact that success is to be rewarded and failure to be avoided. Latin America is dependent upon the same forces today that would be extant if capitalism were non existant. The rot does not come from capitalism but from cronyism. That they appear to walk hand in hand does not mean that they are twins. France and the Airbus spring immediately to mind.

Capitalism works because of its manner in handling failure - not success. What Berman describes in Latin America are the dregs of mercantilism. Won't work and never has worked.

Additionally, he does not describe the means of wresting control from oligarchs. It is possile but it requires a more subtle message than "We want what they have."

Posted by: Rick Ballard at August 1, 2004 06:19 PM

I have some very significant problems with Bush's economic policies as well, but Kerry and Edwards are pandering to "fair" traders and practicing a corrosive form of economic nationalism. I was greatly disturbed by Kerry's use of the code words "fair trade" in his speech. Trade is not a zero-sum game--it only happens if it's mutually beneficial. The U.S. has been the single greatest beneficiary for a free and open world trade regime--better cars, cheaper electronics, apples from Chile in the middle of summer. Trade is absolutely critical to alleviation of poverty worldwide.

Yesterday I just bought a nice-looking pair of jeans for my two-year-old made in Lesotho for $12.50. This is both to my benefit and to the seamstress in Africa. Success in the Doha round will do more than multiple billions in aid for Africa--aid is easily diverted by currupt governments, while wages are far less so. I'll be keeping my eye on both candidates for econopmic pandering during this election year--trade is a critical but seldom-emphasized feature of overall economic policy.

Posted by: Daniel Calto at August 2, 2004 04:33 AM

Part of the problem with socialism is its rejection of markets. Markets are not an ideology -- they are a description of reality. A thing is worth what someone is willing to pay for it, and no more; a thing is for sale at the right price, no less.

A market is a place where those wanting to buy come together with those willing to sell. If a price is too high, people will not buy the product; if it is too low, people will not sell the product. Thus, if prices are too high, there is a surplus of goods because people will not buy at the price offered. If prices are too low, there is a shortage of goods because people want to buy more than are available for sale. Markets represent a process where the optimum price is developed to utilize all of the goods in question.

Labor and capital are no different than any product in that they are bought and sold if the price is right. Socialism does not work because it interferes with the process whereby optimum prices are reached. It introduces artificial external factors that alter the price for labor and capital, making it impossible to reach the optimum price. This creates surpluses and shortages of labor and capital in various sectors of the economy. Eventually such systems are bound to fail because they, by definition, create huge inefficiencies.

Posted by: Ben at August 2, 2004 06:55 AM

A perfect example of the best of the worst. Kerry wants to raise our taxes, so we can budget for all the mommying that the Democracts will want to do, once in power. Money for this social program, money for that social program, money for this minority, and that disadvantaged person... BLAH! What utter horsesh*t. It is not the job of a Federal Republic, to mollycoddle the citizens of its Democratic States. It is the job of the Federal Republic to maintain coperation between States, and provide for the Life and Liberty of all of its citizens. That's all.

On the other side, we have the Republicans, the republicans who are very happy to see new jobs, but don't seem to get that losing 5000 good paying IT jobs, then gaining 4000 McDonalds jobs is not smart economics. After all, McDonalds stock is ok, so the world is a happy place.

he best tax plan would involve large federal tax cuts, large cutbacks in federal programs and then allowing the citiznes to pick and choose which programs, laws, enforcements they whish to fund. They vote for it, they pay for it. They don't vote for it, they keep their money in their pockets.

Anything else, is not part of the original plan.

Your reality may vary.

Ratatosk

Posted by: Ratatosk at August 2, 2004 07:45 AM

Tosk --

I agree, but I think the odds of seeing this anytime soon are near zero.

Posted by: Ben at August 2, 2004 08:53 AM

MJT

"So, sure, Kerry is a "socialist" at heart. But he's also a capitalist like the rest of us"

I would bet that most students of free market economics would have a problem reconciling the idea that one can be a socialist and a capitalist simultaneously.
Capitalism is all about freedom. It respects the individual to make the best decisions (most of the time) for themselves. Socialism is about giving more money and power to bureaucrats to make decisions for "society".
Can even the most "fair" and "enlightened" among us devise enduring solutions better than the collective wisdom of individuals acting in a free market?
Show me the evidence where this has occured and I'll be happy to reconsider. Yes, the free market has plenty of examples of "failure" but, as Rick pointed out, "Capitalism works because of its manner in handling failure - not success".
It is this insight that is critical. Markets correct failures and abuses. In an age where information is so widely available, they work evermore effectively to minimize and reduce failures and to maximize utility.
Socialism fails because there is no incentive for bureaucrats to adjust. In fact there are major incentives for bureaucrats to insist, with a little more money or power, everything will get better.
Of course, it doesn't get better.
Capitalism is messy and painful but it is self-correcting. Socialism always appears more intelligent and "fair" but when its solutions breakdown there is no mechanism save a political crisis to initiate a change in direction.
This is fine for the politicians, it insures the need for their "services". Unfortunately, while they debate more socialist solutions, society and people suffer.

Posted by: JAG at August 2, 2004 08:57 AM

Tosk,

You don't mean to tell me you are one of those people who thinks all IT work is going to be outsourced to India?

Posted by: Matthew Cromer at August 2, 2004 09:51 AM

Matthew,

Nope, I don't think that all IT will be outsourced. In fact, I think we'll see relatively few key IT positions move outside, once its all said and done.

From an Information Security point of view, having offshore developers is fine, as long as they aren't dealing with classified information. As soon as projects start handling personal data (credit cards/SSN) or are focused on corporate secrets, outsourcing becomes terribly risky.

It does suck that thousands of Help Desks, customer service positions, and light coding have gone overseas. It would be nice for those positions to have remained as employement for our own. However, its a business decision that I don't think the government should be making for businesses.

However, it still does not change the fact that the jobs lost to India et all. were 40k -50k jobs and they're being replaced with jobs on a much lower payscale. Making more jobs is no good, if people can't live on the money they're getting from the new job.

Tosk

Posted by: Ratatosk at August 2, 2004 11:10 AM

Tosk,

I'm sure it sucks for the people who lost their jobs and haven't yet found something as good or better.

I don't think it sucks at all for Americans in general. Trade in goods and services is the engine of productivity growth which is the engine of making everyone better off.

The truth is, the economy in this country today and probably tomorrow has a large demand for intelligent, trained folks who can think on their feet and not a lot of demand for folks who are rote learners, don't think creatively, and want desk jobs.

Posted by: Matthew Cromer at August 2, 2004 12:07 PM

Matthew,

I agree. The problem (at least locally) is that nothing really "as good" or "better" has shown up. Some jobs have opened up, but they've been low paying menial jobs. Many of my friends who manned helpdesks, etc are out of work and fast running out of unemployement. One of my friends who lost a $45,000 a year job, is considering working at a local gas station for minimum wage, because his unemployment check is now half of what it was.

I work in a extremely large corporation, in fact one of the largest international retail corporations, and we simply aren't hiring for much of anything.

Hopefully, once the economy gets back on its feet, we'll see that change, but for now they're improving efficencies instead of head count.

Tosk

Posted by: Ratatosk at August 2, 2004 01:16 PM

I found it strange how people were just throwing out estimates of what tax rates would lead to revenue maximization. Are people just divining this by intuition?

There must be a fair number of academic economic studies with rich empircal results on labor market responsiveness. Can anyone link to one? My memory from school was that the impact of taxes at US levels on behavior was very modest.

Two other points:
1) If we are above the maximization point, that Bush is actually being fiscally irresponsible by not cutting taxes more. I think he has almost always been careful to avoid claiming that he believes that his tax cuts will pay for themselves.

2) I have no reason to doubt the statement about the Bush tax cut increasing the rich's share of tax expense. But it is very misleading. Why? Because the payroll taxes (Social Security and Medicare) are more important for most Americans, are regressive and were left untouched. In essence, Bush choose to attack the progressive pillar of the tax system rather than the regressive one. And that leaves out the truly sorry elimination of the estate tax.

Seriously, are there any real academic economists who defend Bush?

Tom

Posted by: Tom G at August 2, 2004 06:46 PM

Ben, you make an involved ideological argument for free markets. I will try to make another one quickly.

First there is a moral argument for markets. It goes as follows: If you offer to sell me a slave and we agree on a price, then we must both think we are better off. If we didn't both think we were better off then one of us would not go through with the deal. Since free trades happen only when both sides believe they are better off, no one's rights are violated -- if I make a mistake and pay too much for a bad slave then it's my own lookout.

This argument is correct in abstract. But in practice it requires a efficient, cheap police and legal systems. If I "make you an offer you cannot refuse", you may feel you are better off to accept but it isn't right. And also there is the issue of third parties. The people downstream of the slave's outhouse, the people who don't want me prostituting her in their neighborhood, the slave herself, etc. When you and I make a free agreement it will not violate our rights, but it may wrongly affect others.

Apart from morality there is the argument that free markets are most efficient at allocating resources. The claim is that markets provide a feedback mechanism. It's true that there's feedback. However, we now have a lot of electrical engineers with a lot of experience building feedback systems. Making them work correctly is not trivial. Without careful design feedback systems may do large regular oscillations, large irregular oscillations, or increasing oscillations; they may stabilise at the wrong point, etc. Even very good feedback systems will usually have some set of inputs that can trip them up, like a judo throw. Claiming there is feedback is not nearly enough.

In practice truly free markets tend to alternate between too many buyers and too many sellers. And usually someone takes on the role of "market maker". He buys when there are too many sellers and sells when there are too many buyers, he evens out the market. He can usually make a profit since he buys low and sells high. So long as falling prices result in more buyers and rising prices result in more sellers etc he can't do too much harm. But when that isn't true -- when for any reason rising prices result in more buyers -- for example when people think prices will keep rising so they want to stockpile now -- then the market maker has leverage to create instability in his market that he can profit greatly from. But under ideal conditions his attempts to destabilise his market will cost him more than he makes from it. Unless he can persuade somebody else to pay the costs while he gets the benefit....

Often market makers have been run as government offices with the goal of stabilising markets, and those have typically been run to create small profits to pay for their operation. Various treasuries and central banks have stabilised exchange currencies, and various multinational oligopolies established entities that regulated their products, for example tin and rubber. By maintaining a stockpile they could moderate price swings provided they didn't try to hold too long to an unrealistic price.

Many of the bureaucratic market makers have been swept away. But sometimes that's only because bigger market makers have replaced them. For example, the US strategic metals reserve is used to stabilise world prices in the metals we have stockpiled.

Markets are inherently noncompetitive in the following way: when a market establishes a price in some commodity, no other market can compete in that commodity in the same region. One market is accepted to be the best, and there is no reason to trade at a secondary market unless the main market rejects you. The largest market can offer the best deals for buyers and sellers, a secondary market must accept a wider spread because of its smaller size. A secondary market may take the lead, but it faces an expensive uphill battle until it does so, and then the original market will have serious trouble. If you have an idea for an improved market, better establish it in a protected region where there are no established competitors and find a way to reduce the barriers after you can already offer a better deal.

A minor point -- markets can be efficient only for commodities. For unique items there is no obvious criterion for how good a market is. So for example, a school that graduates Java programmers may turn out a commodity if they all follow the same coding standards and documentation standards etc. But Java programmers with 5 years experience are not a commodity. This is one of the reasons the job market is run by clueless HR guys who puzzle over resumes.

This is longer than I intended so I'll stop. But my central point is that you are making the evolutionary argument -- that systems which can repair their mistakes tend to improve while systems which cannot repair their mistakes do not. It's a seductive argument but the devil is in the details. Markets are peculiar beasts which sometimes improve in some ways, sometimes spectacularly fail to improve, and in some ways are anticompetitive and cannot improve. The particular feedback mechanisms are vitally important as are the types of variation they must mediate and the patterns of variation.

There are no reliable answers unless you limit the question too much.

Posted by: J Thomas at August 2, 2004 10:15 PM

J Thomas --

I don't necessarily disagree with your points, and I am not arguing that there should be no regulation of markets. Moreover, commerce requires a legal and enforcement structure.

When I referred to markets above, I was doing so in a more general sense than your post appears to indicate. I was not referring to a specific market (e.g., NYSE); to the contrary, I was referring to the market that exists anywhere buyers and sellers come together to exchange goods and services. Markets in this sense are not an ideology - they are a description of reality applicable to any economic system. They are the mechanism by which supply of and demand for goods and services is determined and regulated.

I was simply pointing out that the problem with socialism is that it attempts to deny this fundamental reality. Whenever prices are artificially set, including prices for labor and capital, distortions are introduced into the market. No planning mechanism can beat the market in the long run, as all nations that have tried Marxism have eventually discovered.

As to your specific points, I will respond as follows:

1. Morality -- Markets are amoral by their very nature. Society must impose legal and moral restraints outside of them, and this is appropriate.

2. Efficiency -- It would be impossible to design a more efficient system for the exchange of goods and services. You correctly assert that there are limitations regarding "feedback" of information, but there is no planned system that could prove better. A market gives all of the information that buyers and sellers need to know about prices.

3. Competetiveness -- Markets are not inherently non-competetive. In fact, they are ruthelssly competetive: if a market does not function, it ceases to exist. It may be the case that if I tried to establish a stock exchange in Albany I could not compete with the NYSE, but that misses the larger point: does the NYSE provide a good system for the purchase and sale of stocks and bonds? In any event, this point is not applicable to the manner in which I was referring to markets.

4. Unique goods -- Markets are less efficient for unique goods, but there is no more efficient way of determining a price for a unique good. If I want to sell a painting I did, it is worth only what someone is willing to pay for it. I may insist that it is worth $100, but if the best offer I get is $1, then it is worth $1.

Planned economies set prices for goods and services, and they NEVER get it right. Why? Because no planner has more knowledge than the buyers and sellers themselves. This is one of the inherent flaws with socialism.

Posted by: Ben at August 3, 2004 08:14 AM

Ben, if you believe you aren't disagreeing with me then you misunderstood my post.

What you said about markets was ideology. Real markets are not ideology, they are markets. Your claims about what markets do and how they do them are ideology.

"Efficiency -- It would be impossible to design a more efficient system for the exchange of goods and services. You correctly assert that there are limitations regarding "feedback" of information, but there is no planned system that could prove better. A market gives all of the information that buyers and sellers need to know about prices."

The only information a market is guaranteed to give is a buying price and a selling price. You claim that there is no additional information that might allow more efficient exchange of goods and services?

"Competetiveness -- Markets are not inherently non-competetive. In fact, they are ruthelssly competetive: if a market does not function, it ceases to exist. It may be the case that if I tried to establish a stock exchange in Albany I could not compete with the NYSE, but that misses the larger point: does the NYSE provide a good system for the purchase and sale of stocks and bonds? In any event, this point is not applicable to the manner in which I was referring to markets."

When a market has multiple sellers, they can compete with each other. When a market has multiple buyers, they can compete with each other. Mostly markets do not compete, and when they do the biggest market has the strong advantage of economy of scale. Your argument is similar to somebody from a one-party government explaining that their one party is a good system for representing voters.

"Unique goods -- Markets are less efficient for unique goods, but there is no more efficient way of determining a price for a unique good. If I want to sell a painting I did, it is worth only what someone is willing to pay for it. I may insist that it is worth $100, but if the best offer I get is $1, then it is worth $1."

Only if you sell. If somebody buys it for $100 and sombody else buys it from them for $200, it's worth $200, right? And if nobody else is willing to buy it for $200 or more, then it doesn't get sold again. So the value of a unique item is the price the highest bidder will pay.

If you think it's worth $100 and nobody will buy at that price, and you don't sell, then it's worth $100 to you. Then later if somebody offers you $99 and you still won't sell that proves it's worth $100 to you. And when somebody does offer $100 and you sell, that really decides it. We won't find out how much it's worth to the buyer until they sell it.

I don't know why you'd say the value is determined by the second-highest bidder.

The value of a commodity is determined by the price the lowest seller will sell for. If the chinese say that they'll sell a dollar for a tenth of a renminbi, then that's the price until they run out of dollars. We can sell dollars for less but we can't sell them for more.

"Planned economies set prices for goods and services, and they NEVER get it right. Why? Because no planner has more knowledge than the buyers and sellers themselves. This is one of the inherent flaws with socialism."

Established markets consistently get run by market-makers who plan. Maybe they never get it right, my impression is that they usually get it more right than a market with no market-maker, and sometimes they make catastrophic mistakes. If market-makers manage prices better than socialists do, it's because those particular socialists are not as efficient at managing markets. Unmanaged markets tend to be very inefficient.

Of course there's the question what it means for a market to be efficient. I say other things equal, a market is more efficient if it gives more buyers and sellers a quicker deal, and also if it has fewer sharp price fluctuations. That's two things that have to be balanced somehow. Here is a third thing -- a market is more efficient when its market-maker makes less money off of it. Overhead also matters. These are hard to measure particularly when you don't get two competing markets working in the same background. So in general people argue that one sort of market is particularly efficient from their ideology, and not from data.

Posted by: J Thomas at August 3, 2004 03:04 PM

J. Thomas --

1. What I said was not ideology. A market is a description of reality. When a buyer and a seller arrive at a price agreeable to both, a transaction occurs. This is a market.

We are talking past each other because we have different concepts of what a market is. To you, a market is apparently a physical place where goods and services are exchanged. To me, a market is the sum total of all transactions involving a particular good or service in a particular area. It is meaningless to speak of market makers and middlemen in this context.

2. "The only information a market is guaranteed to give is a buying price and a selling price. You claim that there is no additional information that might allow more efficient exchange of goods and services?"

There is no more efficient way to determine the sale price of goods and services.

3. "When a market has multiple sellers, they can compete with each other. When a market has multiple buyers, they can compete with each other. Mostly markets do not compete, and when they do the biggest market has the strong advantage of economy of scale. Your argument is similar to somebody from a one-party government explaining that their one party is a good system for representing voters."

You are missing the point. It makes no difference whether there is competition between markets. It only matters whether there is competition between buyers and sellers.

4. "Only if you sell. If somebody buys it for $100 and sombody else buys it from them for $200, it's worth $200, right? And if nobody else is willing to buy it for $200 or more, then it doesn't get sold again. So the value of a unique item is the price the highest bidder will pay."

If nobody else is willing to pay $200, the owner can keep it or sell at a loss. The value of a unique item is whatever someone is willing to pay for it at the time it is for sale. If you have something you paid $200 for and nobody is willing to buy it from you for more than $150, it is only worth $150.

5. "I don't know why you'd say the value is determined by the second-highest bidder."

If I said that, I did so unintentionally.

6. "The value of a commodity is determined by the price the lowest seller will sell for. If the chinese say that they'll sell a dollar for a tenth of a renminbi, then that's the price until they run out of dollars. We can sell dollars for less but we can't sell them for more."

Not exactly. The value of commodities fluctuates depending on supply and demand. Also, you need to consider price discrimination (e.g., senior citizen discounts), which can be used to squeeze some additional revenue out of goods by offering them for sale at different prices to different people.

Nothing has an intrinsic value. It is only worth what someone is willing to pay for it at a given time. Markets are by far the most efficient method for determining that value.

7. "Established markets consistently get run by market-makers who plan. Maybe they never get it right, my impression is that they usually get it more right than a market with no market-maker, and sometimes they make catastrophic mistakes. If market-makers manage prices better than socialists do, it's because those particular socialists are not as efficient at managing markets. Unmanaged markets tend to be very inefficient."

Market makers do not plan economies. They use historical information to make market fluctuations less severe. They cannot function without history, however. Socialists do not have that history, and if they do, they soon lose it. Moreover, you ascribe far to much to market makers. In most markets there is no market maker -- E.g., when I go to the corner store to buy a magazine, there is a market but no market maker.

8. "Of course there's the question what it means for a market to be efficient. I say other things equal, a market is more efficient if it gives more buyers and sellers a quicker deal, and also if it has fewer sharp price fluctuations. That's two things that have to be balanced somehow. Here is a third thing -- a market is more efficient when its market-maker makes less money off of it. Overhead also matters. These are hard to measure particularly when you don't get two competing markets working in the same background. So in general people argue that one sort of market is particularly efficient from their ideology, and not from data."

Efficiency means efficiency. In this context, it means developing a price at which the most transactions will occur. Fluctuations have nothing to do with efficiency (although it may be desirable to minimize them). Overhead, profit, middlemen, etc. also have nothing to do with efficiency of the market, although these may affect prices.

There are NEVER two competing markets because the "market" is not a physical place. It is a fictional concept that refers to the sum total of all transactions involving a particular good or service in a particular area. The specific locations where two transactions are consummated may differ, but both are part of "the market."

Posted by: Ben at August 3, 2004 03:41 PM

Ben, I see no reason to keep disagreeing with your ideology. (You don't see it as that, but your concept of what is important is shaped by your market ideology. What you see as reality is warped by your preconceptions.)

I will however mention that your definition of value for a unique object sets the value as the price it goes for at auction -- the highest bid. If somebody else is selling an object and you bid $200 and buy it, then it's worth $200. But if you already own it and put it up for auction and refuse to sell when the price only reaches $150, then you say it's only worth $150.

The way you're saying it, you get to define the value if you're the buyer who buys it at that price, the highest bidder. But if you already own it you no longer get to define the value, instead the second-highest-bidder, the highest bidder other than you, defines the value.

The person who values it the highest only gets to set the value when he doesn't own it.

But this doesn't really matter since it's entirely theoretical and has no practical effect on anything except in the way it affects your thinking.

Oh, one more -- when you go to the corner store to buy a magazine, is it a market? Do you dicker over price? Do they have a limited number of magazines and you and the other customers bid for them? How does supply-and-demand determine magazine prices? ;)

Posted by: J Thomas at August 3, 2004 09:53 PM

J Thomas --

1. Supply and Demand determines magazine prices because, based on the price, I either buy or don't buy that magazine or buy another magazine instead. Vendors set prices to maximize profit, i.e., where the combination of number of copies sold and price per copy yields the best profit for the vendor.

2. If I place a value on something at $200, and nobody is willing to pay that price when I want to sell, is it worth $200? No. In the final analysis, it doesn't matter what value I place on an item as seller if nobody will purchase at that price. That is how markets determine value.

3. A market is not an ideology. It explains reality. It is a set of facts because it is a reflection of actual decisions by actual people who set prices by purchasing goods and services offered for sale. You consider a market to be an ideology because you do not define a market as the sum of individual decisions to buy and sell goods and services.

Socialism is less efficient by definition because it introduces outside factors into the equation. When prices are set by someone other than actual buyers and sellers, the person setting the price inevitably mistakes the preferences of actual buyers and sellers because he cannot have perfect information that is always up to date. If he receives his information even 1 hour late, he is less efficient than the decision being made at the instant when the sale would have occurred.

4. The items I consider unimportant are unimportant because they do not affect the decisions of buyers and sellers to purchase or sell at a given price. Those items may be important for other reasons, and it may be appropriate to take them into account when setting government policy. BUT, they have no bearing on setting prices (except to the extent that they may cause some items to be overpriced and therefore not to sell).

Posted by: Ben at August 3, 2004 10:47 PM

Ben, I guess I'll go once more through the cycle since you did.

1. Magazine production involves a set of complicated feedback loops, they want to print the number they think they can sell plus an overage, etc. Prices tend to be the same for whole classes of magazines and each is afraid to break out of that box. But prices for subscriptions -- not store sales -- can vary a lot. You can accept as a matter of faith that most publishers try to set prices to maximise profits. But if you read about the publishing industry in detail you will get the idea that it has for a long time been run in such an utterly incompetent manner that no one can possibly tell how to maximise profits, and they have weird traditions that they can't break out of that would prevent it even for competent publishers. Publishing is not unique that way, it's just easier to understand because writers have an interest in finding out about it, and they write about it and get published.

2. If you set a value of $200 on your possession and refuse to sell for less, how is it not worth $200? It doesn't matter what lower price others are willing to buy if you refuse to sell. Can you see that this is the same argument you give, but turned inside out?

3. A real-life market is a reality, and it doesn't explain anything. Your explanation about what a market means is an ideology. The difference is between what actually happens versus what you think about it. When you make it mean something you are doing ideology. You do give it meaning.

So do I. I say that the human purpose of a market is to allow humans to benefit each other with minimum fuss. A market is more than a collection of transactions with no context. Markets include mechanisms to allocate resources. Ideally markets wouold provide people with the data they need to optimally allocate their current resources. Who gets the filet mignon and who gets the rump roast? Who gets the titanium and who makes do with tungsten-coated copper? When there isn't enough, people bid on their first choices and the losers choose something else. The price of titanium has to get really high before it increases the supply because it's a side benefit of producing something else, and a bigger profit on it adds a small profit to the total operation. Sometimes the feedback loops just don't work well. So the shortages have to get distributed.

Now, the idea that all of this will get resolved optimally just by people looking at current prices is absurd. It takes faith to believe something like that. And the idea that supplementing current prices with price histories and also with knowledge about production cannot help, is also a faith thing. Note that when the NSA got satellite data to predict world crop yields, and top CIA appointees used it to play the futures markets, that did not do much to improve price structures for farmers or anybody else.

Of course oldfashioned socialists didn't do very well, among other things they lacked computation power. Similarly oldfashioned supply chains were far less efficient than modern JIT methods. The question isn't how bad old socialist systems were. The question is how real moderately-efficient systems actually work.

When you reify the preferences-of-the-instant of particular buyers and sellers, you are modeling the noise.

4. When the only thing you care about is the decision to buy or sell at a given price, I have to conclude that the reason this is important to you is your ideology. To my way of thinking the price is a feedback mechanism, like the concentration of ATP or GDP or cAMP in a cell. What is important to me is the feedback. This feedback sometimes tells sellers how fast to produce more. And particularly when that fails it tells buyers to prepare for shortages.

Price is a useful measure. It can prevent wasteful things like growing corn for gasohol where the amount of fuel used to grow and harvest the crop is more than the crop produces. Barring subsidies the price won't support that. But producers can do better with more data, like estimates of future demand. When future demand is likely to be high, buyers might try to buy more now to stockpile in case they can't get enough later, and that might increase the price enough now that suppliers notice and start to produce more. That's pretty chancey. Sometimes it works like that but not dependably, and the warehousing for buyers to squirrel away things they might need has a cost too. Contracts for future production help more than just knowing the current price. But see, what's to keep us from having the Philosopher's Dinner problem? In an ideal world there are no shortages, but in reality it happens. The ones who get the resources are not those who most benefit the economy but those who had the foresight to sequester them early, before others saw there would be a shortage.

Markets can in theory handle any objection, because whatever useful information anyone notices can somehow be translated into a price change at the best time, which can then influence the people it needs to influence. So the important things get left out of the model but are assumed to work by default. This is a copout.

Price is a mechanism to aid allocation of resources. By pretending that it is the only information you overload it far too much. This lets you simplify the model by leaving out most of the interesting parts. Doing everything with just price would be like making a cell regulate everything with just ATP levels.

Posted by: J Thomas at August 4, 2004 03:34 AM

J Thomas --

Obviously, I disagree with most of what you said in your last post. We can simply agree to disagree. I have only a few closing comments:

1. I will assume that your view of the magazine industry is correct. None of that changes how the market for magazines operates. It simply means that magazines are not sold at the optimal price.

2. "If you set a value of $200 on your possession and refuse to sell for less, how is it not worth $200? It doesn't matter what lower price others are willing to buy if you refuse to sell. Can you see that this is the same argument you give, but turned inside out?"

No, it isn't. My argument specifically assumes that I want to sell. The point is that regardless of how much value I place on an item, it is only worth what someone else is willing to pay for it at the time I want to sell it. If there is no sale, none of this makes any difference.

3. I am looking at markets purely in terms of economics. You are introducing other factors. I said previously that it may be appropriate to do this when setting social policy. BUT, when you do that, don't call it economics.

As a side note, your litany of complexities demonstrates precisely why socialism is unworkable. If it is impossible for people actually buying and selling to obtain and process all necessary information, it is even more difficult for someone a step further removed from the information to do so.

4. "When the only thing you care about is the decision to buy or sell at a given price, I have to conclude that the reason this is important to you is your ideology. To my way of thinking the price is a feedback mechanism, like the concentration of ATP or GDP or cAMP in a cell. What is important to me is the feedback. This feedback sometimes tells sellers how fast to produce more. And particularly when that fails it tells buyers to prepare for shortages."

I don't entirely disagree with this. Perhaps I was not as clear as I should have been above. Price is not the only thing I care about. My point was that there is no better mechanism for setting prices than markets because markets are where there is the most access to the most timely and accurate information abour consumer preferences.

I do not, however, view price as the Holy Grail of society. I view it as a reality to be taken into account when setting social policy. Prices of goods and services are what they are. If a gov't wants to set prices artificially low, it can do so, but it must realize that in doing so people will consume more than they otherwise would. (E.g., if we subsidize prescriptions, people will use more of them than they would if they paid market price). Conversely, if gov't wants to set prices artificially high, it can do so, but it must realize that in doing so people will consume less than they otherwise would. (E.g., if we raise the minimum wage, some of the people currently earning minimum wage will lose their jobs because the price of labor is increased beyond what some employers are willing to pay). I did not say that any of this was either morally right or wrong -- I simply said that it was a reality that must be taken into account.

5. The recent California energy crisis was, to a large extent driven by bad economics. Building restrictions on power plants artificially depressed the supply of power. This meant that the people who had power could charge more for it given that they could sell all of their available power at a higher price. It may or may not be good for society to do this -- BUT when you restrict supply, prices will rise, so if your policy is to restrict supply, you must take into account the FACT that prices will rise.

On the flip side, supply was artificially increased by the state rate commission's refusal to permit utilities to charge more. Since this state subsidy (at the expense of the utilities) caused the price paid by consumers to be lower than it otherwise would have been given the supply of power, consumers used more power than they would have at a higher price. Again, subsidizing power usage is neither good nor bad, BUT it means that the demand for power will increase.

The result: shortages. This was inevitably the result, because buyers wanted to buy more than sellers wanted to sell. It could be no other way. In economic terms, I do not criticize the state either for restricting supply or increasing demand, but I criticize it strongly for doing both at the same time.

The overall point: Make whatever policy decisions you want to make, but admit when you are doing so that there will be consequences. Try to determine what those consequences are likely to be and take them into consideration when determining whether to enact the policy in question. DO NOT ignore the likely consequences when setting policy because they materially affect the analysis of whether the policy is either good or bad.

Posted by: Ben at August 4, 2004 07:58 AM

Ben, I agree we should largely agree to disagree. I'll do just a couple of last things.

1. I get the strong impression the magazine situation is not unusual. Many things, perhaps most, are not sold at the optimal price. And in many circumstances it would not be worth what it would cost to discover the optimal price.

3. It ain't necessarily so that the immediate buyer and seller have access to the most important information. And their somewhat-adversarial position gives them reason to conceal information. I certainly wouldn't argue for a bureacratic solution, but quite likely designed solutions would often be better than the ad hoc ways we have now.

4. Of course markets are the best way to set prices. Similarly, police departments are the best way to set parking tickets and the Green Stamp company is the best institution to redeem green stamps. (I haven't seen any of those since I was a kid, I wonder what happened to them?)

Prices are one of the feedback mechanisms that economies use. It makes your thinking easier if you pretend there aren't any others. And since all the available information that reaches buyers, sellers, and middlemen can possibly affect price, you can make up a system where there is no other mechanism. But it doesn't have much to do with real life.

Sometimes price has a large effect on production and consumption, and sometimes it doesn't. So for example, if castor oil was a quarter a bottle instead of a dollar, I doubt you'd take four times as much of it. The usual approach with medications is to try to take the right amount and try to ignore the price.

5. The california electricity crisis is a fine example. The producers weren't particularly competitive, and got the laws set up to favor them. Demand for electricity was pretty inelastic particularly in the southern california summer. The situation was designed to be abused. Some places the rates weren't particularly controlled and people wound up paying more than double their previous bills for power that was still not at all reliable. Their big cost was air conditioning and they weren't willing to cut their usage even for very high prices. Supply and demand was not useful -- partly because limited amounts of electricity could come in from outside, and there wasn't a lot of incentive to bring it in from outside. You can express it as supply and demand as if it was all an accident except on the part of the government, but given Enron why would you think of it that way? You could just as easily express feudalism as supply-and-demand. The baron has all the money and all the demand, the peasants have no other customer so they work as hard as he tells them to for no pay. I'm not sure it's a useful approach.

My point is, price calculations give you one tool. Don't ignore the other tools. You can use price when you set up feedback loops, but don't assume the feedback will work the way you want it to unless you design carefully and then test.

Once I listened to a husband and wife argue. The wife was a telephone company executive, and her husband, an economist, complained that the system wasn't fair. The problem was connected to the fact that there wasn't enough capacity so at peak times people were getting system-busy tones, and he thought that every approach she considered to fix that was unfair.

My suggestion was that when there were too many calls, give everybody a system-busy signal and let them dial their calls as long-distance if they want to. Adjust the local-distance-rate until the paying calls are just below capacity. Use the money from peak local times to expand capacity.

So the people who were most willing to pay for their calls would get to use the system at peak times while the others could wait until there was room for them, and the more money people were willing to pay for service at peak times, the faster capacity would increase so they didn't have to. The only problem with it is that people might be slow to notice rate changes.

A monopolist could set up a feedback system that would be useful to its customers, if it wanted to.
Or in a competitive situation it might not have that luxury and might have to compete in whatever ad hoc feedback system happened to develop by accident.

Posted by: J Thomas at August 4, 2004 11:42 PM