31 May 2017

Choosing the Ceteris Depending on the Desired Paribus

Tax policy, Trump 20 Comments

Let me repeat for newcomers: I am friends with Don Boudreaux and have made sure (over email) that he knows my intentions are pure when I do posts like this. I’m not “blowing him up,” it’s just that I only read a few blogs and so if I talk about something here, it will often concern him.

Anyway, in this recent post Don is rightly criticizing Wilbur Ross on tariffs. Ross had claimed that “because American auto tariffs are so much lower than those of other countries, the only way U.S. trade negotiators can get trading partners to reduce their tariffs is by giving concessions against other U.S. industries. This, then, requires the government to pick winners and losers in our own economy.”

So Don didn’t think that was a good argument. He responded to Ross like this:

Uncle Sam’s picking of winners and losers occurs not when it reduces some tariffs but, instead, when it imposes tariffs in the first place. Each tariff creates government-picked visible winners whose booty comes at the larger expense of many unseen losers. Therefore, reducing or eliminating any tariff, contrary to Mr. Ross’s claim, gets government further out of the cronyist business of picking winners and losers. Put differently, criticizing reductions in a subset of tariffs as ‘picking winners and losers’ is akin to criticizing a thief’s decision to reduce the number of people he robs as ‘picking winners and losers.’

That’s great; I endorse both the economics and the morality behind Don’s response.

The only problem is, this is not how many libertarian economists reacted when Trump/Pence worked out the Carrier deal. Later on, it came out that there might have been sticks involved, but when the story first broke, it was construed as carrots of special tax breaks for Carrier. And at that time, lots of libertarians objected quite strenuously to this proposal, saying the government shouldn’t be picking winners and losers in doling out these tax breaks.

I was curious to see what Don’s take was. I didn’t see him using the phrase “picking winners and losers,” but he was definitely critical. He wrote:

I’m all for cutting taxes. But I oppose selective tax breaks given to a particular business in exchange for that business agreeing to act in ways that it would not otherwise. Such selective tax breaks are merely bribes to entice particular businesses to do the government’s bidding.

Such a bribe was negotiated by President-elect Donald Trump and Vice-President-elect Mike Pence (still governor of Indiana) to be paid by Indiana to Carrier’s parent company, United Technologies, in exchange for abandoning plans to move 1,000 jobs to Mexico.

Unsurprisingly, politicians and Carrier’s workers are delighted. But even The New York Times was favorably impressed. It reported that this deal “also signals that Mr. Trump is a different kind of Republican, willing to take on big business, at least in individual cases.” (I’ll bet lots of big businesses are salivating at the prospect of being “taken on” this way by President Trump!)

But there is no “win” or “good news” here for anyone but Trump (who scored political points) and United Technologies workers and shareholders (whose incomes now are subsidized by taxpayers).

What this deal boils down to is Trump and other politicians spending other people’s money to bribe a corporation to continue to operate in an economically inefficient manner.

Now to be sure, there are some important differences between the two cases; I included a lot of the context to be fair to Don. But notice in particular that when it comes to tariff reductions, Don classifies that as restoring freedom to American consumers. But when it comes to corporate income (?) tax cuts on Carrier, Don doesn’t classify that as restoring freedom to Carrier’s shareholders and workers; instead he calls it subsidies provided by the taxpayer.

Either approach is defensible in isolation. But I’m not sure there is a principled reason to use one framing in the Carrier case, and the opposite framing in the tariff negotiation case, except that the Trump Administration officials on the other side of the policy position are using bogus logic to defend their view.

P.S. I’m not posting this so much because “Hey another Trump post!” but rather as an example of using different assumptions in an economic argument. I think we economists do it all the time; I’m only singling out Don because I just read this and it popped into my head. For another example, Noah Smith once brought up (back when I still read him) the idea that libertarian economists will immediately cite the tax incidence analysis when a politician proposes a new tax on businesses. But when it comes to the income tax, libertarian economists seem to think that pre-tax wages and salaries are what they are, and a high marginal tax rate will be totally absorbed by the worker (instead of partially “passed on” to the employer by pushing up pre-tax wages and salaries). Whether this is empirically important, I don’t know, but Noah was right that it never once occurred to me to use the tax incidence analysis when it came to taxing labor income.

20 Responses to “Choosing the Ceteris Depending on the Desired Paribus”

  1. Keshav Srinivasan says:

    Bob, the difference between the two cases is not whether you’re restoring freedom or not, but rather whether you’re being selective, i.e. whether you’re picking winners and losers. By eliminating a tariff you’re eliminating a policy that picks winners and losers, whereas by giving a special tax break to Carrier you’re creating a policy that picks winners and losers.

    • Stephen Dedalus says:

      Good illustration of the problem Bob is noting, Keshav!

    • Bob Murphy says:

      C’mon Keshav, the way that Don described a tariff as “picking winners and losers” could be applied to whatever taxes Carrier is currently paying. And moreover, what Ross was saying is that he would be in the position of deciding which lucky sectors would get their tariffs reduced, and which would keep them.

      • guest says:

        I’m largely with Bob on this one.

        Tax reductions, even when the government offers them in exchange for telling a company how to do business, is not picking winners and losers.

        But I think you’ll agree that such companies are poorer (psychic loss) to the extent that they would have done business in a way that suited *them* if the government wasn’t threatening them with higher taxes.

        In the immediate term, they are monetarily better off, but since they have to do what the government says as opposed to paying attention to the price signals sent by consumers and businesses involved in lower-order stages of production, they are, in some way, making malinvestments.

    • The Original CC says:

      Wait…. I had the same reaction as Keshav. I don’t understand the objections to KS’s comments.

      Cutting tariffs for an entire industry surely is different from granting a tax break to one company in one state, right?

      • Harold says:

        I think there is a clear difference and one could reasonably favor one but not the other. However, when he says “whose incomes now are subsidized by taxpayers” he seems to be using the same justification that is rejected by his arguments on tax breaks.

      • Bob Murphy says:

        Sure of course they are different. But look at Don’s analogy about the thief. Is that only valid if the thief stops robbing a whole class of people? What if he just stops robbing one particular person, would Don not think that was great?

        • Harold says:

          “would Don not think that was great?”

          Would that would depend on what the person had to do to stop being robbed? If the thief said “I won’t rob you if you rob both your next door neighbors” that would not be a good thing.

          • Bob Murphy says:

            OK but that’s not the issue here. Keeping a plant in the US is not violating someone’s rights.

            If the thief said, “I want you to hire my son-in-law and then I won’t rob you,” and the person agreed, then the person must be better off, so presumably Don would think that’s better than the status quo. (I’m assuming the person could “freely” reject the offer, and not think the thief would punish him for rejecting the offer.)

            • Harold says:

              Lets see if I have it. Thieving is a bad thing. If we take a particular level of theft as a given, then you argue that anything that reduces that is on balance a good thing as long as the required actions do not violate anyone’s rights.

              If we view this from a libertarian perspective that does seem to be a consistent argument as long as we ignore moral hazard – that is the level of theft is given and would not increase due to the extortion.

              If the thief offered not to rob the victim as long as the victim agreed to have sex with them, that would also be a net gain, as both parties prefer this outcome to the theft.

              • Bob Murphy says:


                With the “Lets see if I have it” you’re acting like I’m advancing some wacky interpretation of Don’s statement. You really need to get out your smoking pipe and ponder what it could mean, when someone says it’s a good thing if a thief spares one of his victims, full stop?

              • Harold says:

                I will sit here, smoke and ponder for a bit.

  2. Tel says:

    It would be difficult to find any action of government that does not create winners and losers. Suppose government were to outlaw murder (his name was Seth Rich) … well, that’s not much good if you had planned to kill someone and now they blocked you, is it? Let’s say government puts forward a law against rape… egats, now the rapists are worse off, and all of their potential targets are better off.

    Picking winners, huh?

  3. Stephen Dedalus says:

    “Noah Smith once brought up (back when I still read him) the idea that libertarian economists will immediately cite the tax incidence analysis when a politician proposes a new tax on businesses. But when it comes to the income tax, libertarian economists seem to think that pre-tax wages and salaries are what they are, and a high marginal tax rate will be totally absorbed by the worker (instead of partially “passed on” to the employer by pushing up pre-tax wages and salaries).”

    Are you sure that wasn’t Callahan? Because I remember him saying that, and you citing it at the time.

    • Bob Murphy says:

      Noah definitely brought it up, and I think Gene brought up a different example of this type of thing (which I also noted, but now I can’t remember what it was).

      • Stephen Dedalus says:

        Fair enough!

  4. S.C. says:

    Talking of such-and-such policies as “picking winners and losers” is misplaced in most cases. There is no neutral ground. A policy of competition law, for instance, could be criticized by libertarians as being “cronyist”, but I don’t know why the same can’t be said for libertarian policies.

  5. Major-Freedom says:

    Murphy’s point is so easy to understand I don’t know why posters are questioning it.

    Starting from universal taxation, and then eliminating taxes for everyone except one person, and starting from no taxation, and then continuing to to tax everyone except for one person, are two instances of “picking winners and losers”. Just because one is from a baseline of more tyranny than the other, it does not entitle anyone to lose sight of the fact that they are both generating winners and losers based on the tax system.

    Come on Keshav and others, this is apple pie.

    • Tel says:

      But what are you using as a reference? All actions of government benefit some at the expense of others… and Trump’s actions are no exception.

      To say that “picking winners and losers” is bad is equivalent to saying that all government is bad, and that’s at least a self-consistent point of view if you want to go there. Problem is, many people (Don included) tend to like a bit of government when those winners and losers end up, you know, the right way around.

      I’ll also point out, that when you create a property right, once again you are “picking winners and losers” so if you really want to be 100% consistent you end up without property rights either.

      • Major-Freedom says:

        You make a point I won’t disagree with Tel.

        My comment was an analogy. We can start at ANY baseline, and then imagine getting to it from either end, from more tyranny or less tyranny. The end result is the situation of picking of winners and losers.

        What am I personally using as a reference? Universalizable individual property rights. I would say that is not really relevant to this particular debate about framing.

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