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Moral hazards again
Nov. 12th, 2021 09:45 pmSo Joe Manchin, being a Democrat, wants to continue the child tax credit that was passed early in COVID, but being "fiscally responsible" and a moral, upstanding person, he wants to make sure the money doesn't go to the wrong people -- say, families earning over $60,000/year. Which sounds reasonable: such people are at or above median US income and are arguably not "poor". Is that a good idea?
I was thinking of one of the examples in this post, and decided to try making it quantitative. Suppose your town builds a bridge, and estimates that ongoing maintenance and bond service on the construction costs will be $10,000/year (at first it's mostly bond payments, and those will ramp down as maintenance costs ramp up). Somebody on the City Council suggests that to be fair, we should put a toll on the bridge, so the people who don't use the bridge don't have to pay for it and the people who use it the most pay the most for it. You estimate that 100,000 cars will cross the bridge per year, so that's a dime per car -- easy.
So you build a toll booth on the bridge, (which costs something up front, but let's ignore that) and then you hire somebody to take tolls. In fact, because there are 8760 hours in a year and a full-time job is 2000 hours/year, you hire four and a half people to take tolls (otherwise some people would get through the toll plaza without paying, which would be wrong and unfair). Toll collector isn't a terribly high-skilled job, so you can hire these people for $50K/year each, or $225K/year total. But the occasional scofflaw -- let's say, 0.1%, or 100 cars/year -- goes through the booth without paying, and has to be charged and fined to discourage others from doing the same, and each of these cases costs the police and the court system $1000 on average to process. Now the tolls need to cover not only the $10K/year for bridge maintenance but $225K/year for collecting tolls and $100K/year for enforcement, which (still assuming 100,000 cars per year) means the toll has just shot up from $.10 to $3.35.
Which is enough that an appreciable number of drivers -- let's say 10% of them -- choose to take a longer route that takes an extra ten minutes but avoids the toll bridge. Now there are only 90,000 cars per year paying the toll, so the toll has to go up to $3.72 per car to cover expenses; furthermore, 10,000 cars per year are spending an extra ten minutes each on the longer route, which means at least 1666 person-hours per year being wasted: let's say 2000 person-hours per year (since some cars will contain more than one adult), which is another full-time employee's worth of cost to the local economy, plus whatever additional traffic and pollution comes from people driving these extra hours.
The point of the story, of course, is that sometimes charging "only the right people" is much more expensive than charging everybody, and likewise giving a benefit to "only the right people" is much more expensive than giving it to everybody. To put it in Republican terms, how much bloated government bureaucracy do you want to build to distinguish between the people who "deserve" the charge or the benefit and those who don't?
Back to the child tax credit. If you cut it off at $60K/year, which is about the median household income, then (by definition of "median") you're cutting the number of recipients by a factor of two, and therefore saving roughly half of the outlay, in exchange for some additional bureaucracy to implement it. (If you institute a gradual cutoff, ramping benefits down with your income, you might save a little more or a little less, and you'd need even more bureaucracy to apply the rule.) I have honestly no idea how much it costs to implement something like this, but I can say that if the added bureaucracy to apply the cutoff costs more than it saves, it's clearly a waste of money; if it costs only slightly less, it's arguably STILL a waste of money. Besides, one goal of the credit was economic stimulus. People just above median income will probably spend their tax credits the same way as people just below median income: quickly, in the day-to-day consumer economy, so those dollars have a high multiplier effect in economic stimulus. So if we're still in need of economic stimulus (which will always be arguable), the cost of implementing the ceiling includes not only the bureaucracy to implement it but the lost economic stimulus that the additional credits would have produced.
One can make other arguments about Manchin-and-Sinema's "fiscal responsibility" in cutting the Build Back Better bill down to a tiny fraction of its original size, of course.
If you have the opportunity to borrow money at 2%/year to invest in something with a 1%/year return, how much money is it "responsible" to do this with? Answer: zero, because it's a money-losing deal.
If, on the other hand, you have the opportunity to borrow money at 1%/year to invest in something with a 2%/year return, how much money is it "responsible" to do this with? Answer: as much as you possibly can, because every dollar you do this with makes you money. (In practice, the investment vehicle will probably have diminishing returns, and eventually will no longer return more than the cost of borrowing, at which point you stop investing in it.)
10-year US Treasury bills are currently earning about 1.5% (before inflation), so for any specific component of Build Back Better that seems likely to show a return better than 1.5%, the "fiscally responsible" thing to do is to spend as much as possible (up to diminishing returns) on that component, even if you have to borrow for it.
But that's another topic.
I was thinking of one of the examples in this post, and decided to try making it quantitative. Suppose your town builds a bridge, and estimates that ongoing maintenance and bond service on the construction costs will be $10,000/year (at first it's mostly bond payments, and those will ramp down as maintenance costs ramp up). Somebody on the City Council suggests that to be fair, we should put a toll on the bridge, so the people who don't use the bridge don't have to pay for it and the people who use it the most pay the most for it. You estimate that 100,000 cars will cross the bridge per year, so that's a dime per car -- easy.
So you build a toll booth on the bridge, (which costs something up front, but let's ignore that) and then you hire somebody to take tolls. In fact, because there are 8760 hours in a year and a full-time job is 2000 hours/year, you hire four and a half people to take tolls (otherwise some people would get through the toll plaza without paying, which would be wrong and unfair). Toll collector isn't a terribly high-skilled job, so you can hire these people for $50K/year each, or $225K/year total. But the occasional scofflaw -- let's say, 0.1%, or 100 cars/year -- goes through the booth without paying, and has to be charged and fined to discourage others from doing the same, and each of these cases costs the police and the court system $1000 on average to process. Now the tolls need to cover not only the $10K/year for bridge maintenance but $225K/year for collecting tolls and $100K/year for enforcement, which (still assuming 100,000 cars per year) means the toll has just shot up from $.10 to $3.35.
Which is enough that an appreciable number of drivers -- let's say 10% of them -- choose to take a longer route that takes an extra ten minutes but avoids the toll bridge. Now there are only 90,000 cars per year paying the toll, so the toll has to go up to $3.72 per car to cover expenses; furthermore, 10,000 cars per year are spending an extra ten minutes each on the longer route, which means at least 1666 person-hours per year being wasted: let's say 2000 person-hours per year (since some cars will contain more than one adult), which is another full-time employee's worth of cost to the local economy, plus whatever additional traffic and pollution comes from people driving these extra hours.
The point of the story, of course, is that sometimes charging "only the right people" is much more expensive than charging everybody, and likewise giving a benefit to "only the right people" is much more expensive than giving it to everybody. To put it in Republican terms, how much bloated government bureaucracy do you want to build to distinguish between the people who "deserve" the charge or the benefit and those who don't?
Back to the child tax credit. If you cut it off at $60K/year, which is about the median household income, then (by definition of "median") you're cutting the number of recipients by a factor of two, and therefore saving roughly half of the outlay, in exchange for some additional bureaucracy to implement it. (If you institute a gradual cutoff, ramping benefits down with your income, you might save a little more or a little less, and you'd need even more bureaucracy to apply the rule.) I have honestly no idea how much it costs to implement something like this, but I can say that if the added bureaucracy to apply the cutoff costs more than it saves, it's clearly a waste of money; if it costs only slightly less, it's arguably STILL a waste of money. Besides, one goal of the credit was economic stimulus. People just above median income will probably spend their tax credits the same way as people just below median income: quickly, in the day-to-day consumer economy, so those dollars have a high multiplier effect in economic stimulus. So if we're still in need of economic stimulus (which will always be arguable), the cost of implementing the ceiling includes not only the bureaucracy to implement it but the lost economic stimulus that the additional credits would have produced.
One can make other arguments about Manchin-and-Sinema's "fiscal responsibility" in cutting the Build Back Better bill down to a tiny fraction of its original size, of course.
If you have the opportunity to borrow money at 2%/year to invest in something with a 1%/year return, how much money is it "responsible" to do this with? Answer: zero, because it's a money-losing deal.
If, on the other hand, you have the opportunity to borrow money at 1%/year to invest in something with a 2%/year return, how much money is it "responsible" to do this with? Answer: as much as you possibly can, because every dollar you do this with makes you money. (In practice, the investment vehicle will probably have diminishing returns, and eventually will no longer return more than the cost of borrowing, at which point you stop investing in it.)
10-year US Treasury bills are currently earning about 1.5% (before inflation), so for any specific component of Build Back Better that seems likely to show a return better than 1.5%, the "fiscally responsible" thing to do is to spend as much as possible (up to diminishing returns) on that component, even if you have to borrow for it.
But that's another topic.
