Social Democracy: The Takeover of Private Markets

Historically, conservative economists like myself see the private, market-oriented economic system as the best way to improve the well-being and opportunities for our fellow Americans.  Adam Smith’s 1776 book, The Wealth of Nations, made the first comprehensive case for the superiority of private markets with private capital as the means of achieving the greatest welfare from the economy’s scarce resources.  Consquently, Smith is sometimes called the Father of Capitalism.  

Smith argued that one could confidently rely on private markets because, in following their own self interest, private producers have the strongest incentive to discover and produce what consumers want.  Smith was distrustful of leaving the management of the economy to government both because of its lack of motivation and because of the inevitable loss of personal liberty.  As he put it in these thoughts: 

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”  

“I have never known much good done by those who affected to trade for the public good.”

In 1950, the French-born economist Gérard Debreu proved Smith’s intuition mathematically by showing that a competitive, private markets would yield a stable economy.  His proof, using topology and other advanced mathematical demonstrations, won him the Nobel Memorial Prize in Economic Sciences in 1983. (It is officially the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.)

Socialism, in contrast, asserts some inherent advantage from giving control of the economy to government rather than the marketplace.  Unnlike capitalism, socialism has offered no scientific justification for either its stability or efficiency.  It relies on the false premise that a bureaucratic system can better determine people’s needs than the people themselves.

It is also the case that most true socialist experiments have failed, including the UK, Israel, India and the Soviet Union.  Most justifications of its modern use are ad hoc and political in nature.  This quote from the socialist US politician Alexandria Ocasio-Cortez, illustrates the vagueness of the claims articulated in its favor: 

“To me, what socialism means is to guarantee a basic level of dignity. It's asserting the value of saying that the America we want and the America that we are proud of is one in which all children can access a dignified education.”

Nonetheless, many western countries, including the US, have parts of their economies that are essentially “socialized”.  K12 education in the US is one of our most prominent examples.  The balance between use of a private market economy (capitalism) or a government command-and-control economy (socialism) is reflected in the extent of taxation.  As the name implies, a free market economy is one that is guided by “the invisible hand”.  A more socialized economy relies on the explicit guidance of the very visible hand of government.  Thus, notions of a democracy that advances individual freedom conflict with use of the socialist path.  

Alexis de Tocqueville, the 19th century French historian and political writer, stated the conflict this way:  

“Democracy and socialism have nothing in common but one word, equality… while democracy seeks equality in liberty, socialism seeks equality in restraint and servitude.” 

In my view, the virtues of liberty and efficiency that attend market capitalism more than compensate for any disparities that may occur in market outcomes.  Despite the imbalances among individuals that may arise, everyone can enjoy a higher standard of living than would otherwise be the case.  In extreme cases of income disparity, re-distributional assistance can be provided by tax policy and voluntary aid.  Conversely, a case can be made that regulating equality of outcomes retards the standard of living for everyone though adverse effects on work behavior.  

The current emphasis in political circles on the supposed inequality of the US household income distribution are intentionally—or ignorantly—distorting the data. Specifically, critics of the current distribution of income in the US ignore the fact that households with high shares of income also pay disproportionately-high shares of income taxes.  When after-tax income is studied, it reveals that the US actually has the most progressive distribution of net income after taxes of any OECD country, as we have shown in a previous blog.  However, these facts are ignored by progressive critics of the US economy.  They would rather continue to assert that the most successful households are “failing to pay their fair share” of taxes.  

At the same time, critics fail to note that socializing a marketplace tends to create inefficiency and disparity.  Indeed, the most inefficient and dysfunctional sectors of the US economy are those that are dominated by government-provided or controlled services.  This includes the K12 public school system, the highway system, the public health system, and public housing. 

All of these are either inefficient government monopolies, or heavily regulated to the point of restricting and distorting supply.  This calls into question to logic of diverting funds from the private sector to the government sector to improve the equity or efficiency of a marketplace.  

Taxes and Social Democracy

Nevertheless, many European economies embrace socialism to varying degrees.  Many characterize themselves as social democracies—i.e., a democracy with some socialized aspects.  Social democracies do not own or directly control all of the industries or sectors of production, as did the Soviet Union.  Many businesses are free to operate with relative freedom and under private ownership.  Thus, they are not true socialist economies.  

However, inevitably, the greater the share of GDP taken by government through taxation, the smaller is the influence of private sector decision forces.  The decision process in government enterprises lacks the self-disciplining forces that makes the private market so efficient and productive.  Social democracies are thus readily distinguished by their high tax burdens and the attendant loss of private market efficient.  The purpose of this blog post is to illustrate the different degrees to which countries have avoided or embraced the insertion of government authority over the private markets.   

Of course, it is also possible to use regulation to interfere with private market forces without levying taxes or owning enterprises.  Many social democrat countries select to do so, however, in addition to employing high levels of taxation.  This is because there are limits to taxation, and regulating behavior is a more occult way to exert control over the private sector.  

Regulation can be very insidious because it is not necessarily subject to the same scrutiny and oversight as is a change in tax policy.  In Sweden and France, for example, nearly 100 percent of wages are set by collective agreement of unions and the government rather than set privately in the marketplace. 

As a first approximation, however, it is interesting to compare the total share of Gross Domestic Product (GDP) that is diverted from the private sector in the US versus Sweden versus the average OECD country.  Figure 1 displays the GDP shares by type of tax for each of these three examples.  

Figure 1:  Tax Revenues as a Percent of GDP for US, OECD, and Sweden, 2018

For the US, the share of GDP diverted from private sector to government control via federal taxes is only 25 percent of US GDP, with personal income taxation being the largest instrument at approximately 10 percent of GDP.  

By comparison, the average OECD country (inclusive of the US) diverts through taxes  about 35 percent of GDP from the private to the public sector via taxation.  

Finally, at about 45 percent of GDP, Sweden directs one of the largest shares of GDP of any developed country from the private sector to the public sector via taxation.  Only France currently directs a larger share of GDP to its public sector.  

The US, of course, is not free of socialization of what could be private market activity.  The US K12 school system, for example, is effectively a public monopoly that lacks the features of competition, choice, and consumer authority that we believe is key to getting the most out of a good or services.  

Similarly, although most health care services in the US are provided privately, the US subsidizes some health care (e.g., Medicare and Medicaid).  In addition, the operation of the Veterans Health Administration and its extensive hospital network is both publicly funded and government operated.  Its fiscal year 2022 budget is anticipated to be approximately $269.9 billion.  

However, at least half of the 17.7 percent of US GDP related to health care in 2019 was funded and/or operated by the private sector. Medicare and Medicaid (and the aforementioned VHA are the exceptions.  Similarly, higher education receives 2.6 percent of GDP, through both the private sector and the public sector. 

The bottom line is that the US stands out amongst OECD countries in its resistance to diverting private financial resources to the public sector.  It is therefore no coincidence that of the 53 countries for which OECD data on GDP per capita is available for 2019, only Luxembourg, Ireland, Switzerland and Norway have higher per capita GDP than the United States.  Sweden’s GDP is 16 percent lower than the US, the 19-country EURO area is 27 percent lower than the US, and the OECD membership itself averages a GDP per capita that is 34 percent lower.  

Selected citations

Debreu, Gerard (1972). Axiomatic Analysis of Economic Equilibrium, Cowles Foundation Monographs Series, Yale University Press. 

Mladina, Peter (2020). The Economic Performance of Socialism, University of California, Los Angeles. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3522297

Dumbing Down Oregon K12 Graduates

Oregon has scrapped the requirement that graduating seniors show basic proficiency in reading, writing and math in order to receive a high school diploma.  With the passage of Senate Bill 744 last month, the graduating class will not have to demonstrate this minimal competency.  A spokesperson for the Governor said she adopted the policy to benefit “Oregon’s black, Latino, Latina, Latinx, Indiginous, Asian, Pacific Islander, Tribal, and students of color.” 

The idea appears to be that, because some minorities “do not test well”, it is better to forever stigmatize their entire graduating class with a second-rate diploma and education experience. The students are potentially missing out on an opportunity to learn.  As research reviewed in the Scientific American in 2015 revealed, testing offers an important means of learning.  The positive effects of the mental retrieval process involved in preparing for and taking tests has 100 years of research support.  

The poor quality and ineffectiveness of the Oregon K-12 school system should not come as a surprise to Oregonians.  The US News’ Best States rankings for 2021, place Oregon’s school system quality at a paltry 35 out of 50.  Oregon’s Adjusted Cohort Graduation Rate (ACGR) of only 80 percent ranks it as 37th, beaten out by Louisiana at 36th.  

Graduation rates are well known to be statistically important indicators of student performance and prospects.  By this criterion, Whites and Hispanic students have higher ACGR graduation rates than Blacks, at 81.3, 76.2, and 70.0 percent, respectively.  All three rates are exceeded by Asians with a graduation rate of 92.0 percent.  

The performance of Asian students inconveniently belies the common woke claim that minorities’ performance and opportunities have been uniformly held back by some sort of racism instituted by the "privileged class" of Oregon society.  If this were so, then Asians’ consistent outperformance of Whites would not be observed.  The fact that such disparate performance is observed in the same school system suggests that other forces may be at work to make the school experience nadequately responsive to student differences.  

On the student side, the disparate performance can arise from family or other background influences that vary by student.  But it may also be the case that the school system is overly homogenous in its curriculum, teaching methods, or in other structural ways.  During the Covid-19 pandemic, the Oregon school system proved itself to be blatantly and obviously unable to adjust to a different set of circumstances.  Meanwhile the parochial and private schools largely remained open and functional. 

Policies like SB 744, are just ruses to paper over Oregon public school failings.  Oregon should, instead, encourage more flexibility in the provision of K-12 education services.  This would obviate the need for neo-racism programs to create the illusion of caring for the students.  

The Netherlands, with its much more diverse population than Oregon provides a useful model.  The Netherlands allows largely unrestricted entry of private and parochial schools.  Most are supported by capitation payments made by the State.  They are free to implement their own curricula and teaching methods.  Consistency is maintained only by proscribing certain minimum school sizes, compulsory “core” subjects, and by testing learning outcomes on those core subjects.  The Netherlands has schools run by government, too.  But the private competition sets the pace for the whole system.  

It is clear that diversity of providers is a successful model. Two-thirds of Dutch schools were privately run in 2009.  Their PISA score is consistently higher than Sweden, Denmark, Germany, Belgium, Switzerland, Australia, Norway, and the United States.  Instead of moving the goal posts via such things SB 744, Oregon should advance real reform.  That starts by allowing unfettered private entry, and letting parents use of the current per-student public payments, pari passu, to pay for a better education for their kids. 

Focus on Income Inequality: Is it Misleading Policy Makers?

A popular press refrain is that the US suffers from income inequality.  Progressive politicians  translate this to a call for high income households to pay their “fair share” in taxes.  This blog evaluates the current degree of income inequality and addresses the notion that making the tax system more progressive would redress this issue.  

The primary source of income inequality measures is the US Census Bureau and Bureau of Labor Statistics.  They use the Current Population Survey (CPS) data to regularly measure and report household incomes by quintile.  These data give the press and the public the widely quoted measure of income inequality in our economy.  Figure 1 presents the most recent 4 years of the reported, mean household income, by quintiles, and the top 5 percent of the distribution.  

Figure 1.  Mean Income, by Quintile, in Current Dollars  (from US Census: Table H-3)

The ratio in 2019 of the highest quintile to the lowest is about 17, a number that is seen by many proponents of the income disparity movement as excessive.  That one-fifth of US households should earn 17 times that the lowest fifth is proof, to such critics, that a largely free market economy produces “unfair” outcomes.  There are numerous reasons why this comparison is naive, at best.

For one thing, this tabulation is of households and thus does not speak directly to the incomes of individual workers.  Each quintile has 25,000 households.  Households in the lowest income quintile have fewer people in them and more individuals reporting zero earnings.  On the other hand, there are 4.5 times as many earners in the highest income household quintile as in the lowest income household quintile. 

Additionally, the Census does not include income received by the lowest quintile households through many, existing redistributive programs.  This includes such major programs as “negative taxes” such as the Earned Income Tax Credit (EITC), the value of food stamps, medical care, rental assistance, or other existing free or subsidized services targeting low income households.  John F. Early, a former assistant commissioner of the Bureau of Labor statistics, estimated in 2018 that as a result of these omissions, the incomes of the lowest quintile households are understated by “a factor of two or more”.  

Most importantly, the Census data does not account for taxes paid by households with taxable income.  Focusing on the distribution of income without accounting for the associated tax liability exaggerates the disparity of financial resources available to the various household quintiles.  Taxes paid by higher income households reduce those households’ disposable incomes.  Failure to credit the redistributions of the income households’ tax revenue to lower income households exaggerates further the appearance of income disparity.  The greater is the redistribution from high income households to lower income households, the more progressive a tax system is said to be.  On these grounds, the US tax system is one of the most progressive in the world.  

Although income is concentrated in the top percentile groups, tax paying responsibility is even more concentrated.  This concentration of both incomes and taxes is illustrated in Figure 2.  The greater concentration of the share of taxes paid than the shares of income is the signature of tax progressivity.  In the US case, a very small fraction of tax payers pay virtually all of federal income taxes, and their tax share is significantly greater than their revenue share.  Moreover, both distributions are very different from a perfectly equal share (each household has the same income), which is represented by the Flat Distribution line in the Figure 2 graphic

Figure 2.  Distribution of Taxable Income and Tax Obligations in the US, 2019

For example, while the top 3 percent of households earn 30 percent of all income, they pay 53 percent of all taxes.  Similarly, the top 10 percent of households earn 47 percent of all income, but pay 71 percent of all taxes.  

As Figure 2 illustrates, a perfectly “fair” system— where income and tax obligations were equal for all (displayed in the figure as a flat distribution)— would result in the need to shift a huge portion of the total tax burden onto lower income households.  Presently, all of households together that are below the 50th percentile income bear only 3 percent of the total federal income tax burden.   

Different countries address the equity issue differently, trading off concentration of income against concentration of taxation.  Figure 3 reveals this tradeoff for 23 OECD countries using income and tax system data from a 2008 OECD report.  

Figure 3.  The Tradeoff between Income Equality and Tax Progressivity

From Figure 3, there is a clear tendency for there to be a trade-off, in practice, between income concentration and taxation progressivity. Countries like the US and Ireland, for example, have noticeably unequal distributions of income, but compensate for this by also having highly progressive income taxation structures.

Conversely, although no country has a perfectly equitable income distribution (i.e., an inequality index of zero on the X-axis), the ones that come closest, such as Switzerland, Iceland, Sweden and Denmark, are associated with unprogressive tax structures.  However, that approach, especially when coupled with the need to fund government monopolies in the provision of medical care, education, child care, etc., results in the need to broaden the tax base.  The result is that low income households often end up facing high tax rates.  Poor and low income households in Sweden, for example, face very high total income tax rates (in the range of 60 percent).  This results in relatively low standards of living as measured by private consumption spending.  

This approach seems to be favored by the Biden Administration, which plans to introduce a $3.5 trillion social welfare “infrastructure” plan.  To pay for the plan, the Biden administration has stated its intent to raise marginal income and capital gains tax rates significantly on households with incomes in excess of $400,000 dollars.  However, by my estimates, in 2018, this group of taxpayers was already paying approximately three-quarters ($5.5 trillion) of all federal income taxes.  

Even assuming that the spending plans are accurate, therefore, we can expect middle- and low-income households will have to be taxed at higher rates in order to finance the planned spending.  It is difficult to estimate how much additional taxation of lower income households will have be to be.  Increasing the progressivity of the tax system may not necessarily make the distribution of income more equitable.  
Indeed, the economy can adjust so as to defeat the aims of tax reform.  For example, as Laura Jackson and her colleagues at the Federal Reserve Bank of St. Louis have pointed out, when tax progressivity increases, the bottom of the income distribution and the economy as a whole may initially benefit.  This is because lower income households benefit from an increase in disposable income because of the income transferred from higher income households.  

However, the increased marginal tax rates levied on high income households may have adverse effects on investment and employment of others.   As higher income households save, invest and employ less, there will be less taxable income to tax.  To maintain the high Federal spending, the tax base will have to expand to lower income households.

This may explain why, in Figure 3, there are no countries that, in equilibrium, are able to simultaneously maintain both a progressive tax system and equality of income before taxes.  In my view, the emphasis on disparities of income alone, without considering taxation, misleads policy makers. 

_____________

Sources: 

US Census Bureau, Historical Income Tables: Income Inequality, Table H-3, April 04-04-2021.   https://www.census.gov/data/tables/time-series/demo/income-poverty/historical-income-inequality.html

OECD (2008), Growing Unequal? ISBN 978-92-64-044180-0, Table 4.5. Alternative measures of progressivity of taxes in OECD countries, 2008.   

Early, J.F. (2018). “Reassessing the Facts about Inequality, Poverty, and Redistribution”, Policy Analysis, CATO Institute, Number 839.

Jackson, Laura E.; Otrok, Christopher; and Owyang, Michael T. (2019). “Tax Progressivity, Economic Booms, and Trickle-Up Economics.” Federal Reserve Bank of St. Louis Working Paper 2019-034A.

IRS, Statistics of Income Division,  October 2020

Collective Bargaining and Employment Discrimination

Economists have long held the view that discrimination in hiring is best controlled by markets that are competitive.  The rationale is that competition in the product markets will make employers cost-conscious, and that competition in the labor market will focus employers on job applicants’ workplace productivity.    

Employers may harbor some biased views of job seekers based on race, sex, age or other external features.  However, such employers will be punished in the competitive product market if bias leads them to turn away productive workers.  The punishment will take the form of lost of sales and revenues to their competitors who don’t discriminate.  The resulting lower profits ultimately leads inability to compete and closure of the affected firms.  

This automatic disciplinary process is thwarted if regulatory interventions create excess labor supply conditions.  A minimum wage or a wage determined by collective bargaining are both attempts to administratively elevate the wage above its competitive level.  The result of the higher wages will be increased unemployment and greater latitude to discriminate.  The resulting excess labor supply allows employers to express their bias without economic cost.  Bias against a given sex or race of worker does not have to be strong to, nonetheless, create significant disparities in employment.  

This is particularly important to current policy.  The Biden administration has pledged to increase the number and power of unionized labor.  In addition to making American industrial products less competitive on world markets, this amplifies the power of public sector unions.  Teachers’ unions, for example, use the teachers’ union dues payments to underwrite campaigns for left-leaning politicians and teachers.  This, in turn, sustains the public school monopoly and the poor quality of K12 education that results.  Mr. Biden has pledged to eliminate charter schools (which generally are non-union) because they outperform the more costly unionized public schools.

As noted earlier, a side effect of unionized wage-setting is that it makes discrimination in hiring more likely.  Indeed, as Nobel-Laureate economist Gunnar Myrdal observed in his 1944 book, An American Dilemma, “…the fact that the American Federation of Labor as such is officially against racial discrimination does not mean much. The Federation has never done anything to check racial discrimination exercised by its member organizations.”  The same could be said about teachers’ union opposition today to public funding of private schools for black students.

In 2019, Lincoln Quillian et al. published a detailed study of job discrimination across 8 countries using actual data on the outcome of job applications by white versus non-white applicants.  This affords an opportunity to illustrate the impact of unionization on discrimination because the influence of unions on wages varies significantly across countries.  The study used data from 200,000 job applications to determine whether the minority applicants experienced a lower rate of callback than their otherwise-similar white jobseekers.  In low discrimination countries the minority applicants experienced callback rates were about 25 percent lower than white applicants.  In the high discrimination countries, the minority applicants were treated 4 times more negatively than white applicants.  

For each country, a discrimination score was developed as a ratio of the number of applications that must be submitted by a minority applicant to expect an equal chance of a callback as a white applicant.  Figure 1 illustrates a general tendency for counties with high levels of collective bargaining to have high levels of discrimination.  In contrast, as the regression line in Figure 1 illustrates, countries with lower levels of collective bargaining tended to lower levels of discrimination as well.  

The simple correlation across all countries in the sample is approximately +50%, which implies a moderate positive relationship between unionization and discrimination.  An oft-used alternative measure of the degree of discrimination is the unemployment rate of the minority applicant to that of a white applicant.  That correlation from that approach is less persuasive.  The observed correlation is typically +20%, which is much weaker than the correlation displayed here. 

Figure 1: Correlation between Collective Bargaining and Discrimination

The authors had expected that the mainly socialist-leaning European countries would perform better than countries like the US, with less elaborate labor regulations.  In fact, as argued earlier, such intrusions create exactly the conditions in which job discrimination is expected to thrive.  Indeed, Sweden and France, display the highest rates of discrimination, and also had the highest shares of wages determined by collective bargaining. 

Norway, the Netherlands, and Belgium received low discrimination scores, despite the large share of wages that are subject to collective bargaining.  However, the small labor markets limited the number of applications that the researchers could study.  The US cohort f applicants had data from 73,000 applications whereas the number of applications available for study were only 3,500 to 6,000 for these three smaller countries.  In fact, the researchers considered the scores statistically insignificant.  They are plotted in Figure 1 for completeness sake and also because, within the group, higher rates of collective bargaining seem to be associated with relatively higher discrimination rate scores.  This observation, however, does not survive testing for statistical robustness, however.

The German markets, with only about 50 percent of wages subject to collective bargaining fit the hypotheses some what better and, infant  their discrimination score is not testable different from the US score.  The low (12 percent) collective bargaining percentage of the US is consistent with our competitive and relatively unregulated labor and product markets.  It is ironic that politicians who otherwise would describe themselves as progressive would embrace policies that will likely encourage greater unemployment and discrimination of minority workers.  

Sources:

Quillian, Lincoln, Anthony Heath, Devah Pager, Arn- finn H. Midtbøen, Fenella Fleischmann, and Ole Hexel. 2019. “Do Some Countries Discriminate More than Others? Evidence from 97 Field Experiments of Racial Discrimination in Hiring.” Sociological Science 6: 467-496   

Standard of Living: US vs. Social Democracies

The US economic and political system is under attack by left-wing politicians and academics  who find fault both with our free-market economy and the Constitution that guides our public policies and legal systems.  Now in place, the Biden administration appears be adopting policies that are antithetical to these key aspects of our society.  The left, it seems, believes we would be better off if we relied instead on socialist approaches whereby government exerts direct and granular control over more aspects of our lives.  

Some of the discussion focuses on publicly provided services, such as education and public health care.  As an economist, I agree that both sectors are underperforming in the US, but would argue that the problems arise from too much public sector control—not too little.  It is certainly not because we spend too little in these areas.  In 2018, for example, the U.S. spent 16.9 percent of gross domestic product (GDP) on health care, nearly twice as much as the average OECD country.  Similarly, In 2017, we spent $12,800 per student on public education.  This is the second-highest of any country in the world.  

Switching to a model with even more government involvement and spending is thus hard to justify.  Rather, the inept government intervention in both markets should be addressed by greater privatization and competition.  For example, our public school system is a monopoly run for and by its unionized management and labor.  It should be replaced by one where parents and their students are in practical and financial control, and have choices about where and what the students learn.  During the Covid-19 pandemic, parents got front row, video access to the biased and corrupt state of education in US K12 classrooms.  

Similarly, our health system would benefit from removal of the government policies that constrain the supply of health care workers, raise the cost of drug development, make the cost of care opaque, and couple insurance access to employment.  Again, all of these changes would bring more, not less, competition and pricing discipline to health care. The vaunted, government run health care monopolies are not the solution.  Direct regulation of doctor salaries, for example, may bring down cost superficially, but notoriously impose costs in the form of queues for service and rationing of access.  

In most other parts of the economy, such competitive supply and pricing prevails. In so doing, market reigns, the free market elevates our high standard of living.  We can easily demonstrate that our greater use of private markets affords the average American a much higher standard of living than other developed countries.  Measuring the “standard of living” can be done at various levels of granularity, such as measuring the number of rooms in one’s house, the number of automobiles owned, televisions owned, food eaten, etc.  But the simpler and more agnostic approach is to measure the annual dollars that are able to be spent by households on consumption.  Doing so on a per capita basis helps adjust the measure for differences in family size.  

There are some challenges in measuring the standard of living this way across multiple countries.  For example, countries use different currencies whose variable values have to be considered.  In addition, the supply conditions of specific goods and services vary greatly across countries.  A commodity that is very costly to purchase in one country may be cheap to obtain in another.  The goal is to normalize these variable factors and achieve so-called Purchasing Power Parity (PPP).  The basic idea of PPP is to use the prices of specific goods to compare the absolute purchasing power of the individual countries' currencies  

The purpose of this blog is to do just such measurements for the various countries so the comparisons can be made with that of other developed economies.  The Biden administration’s policies seem to be modeled on increasing socialization of the economy.  Thus, I have drawn the sample from OECD member economies, some of which are modeled on this philosophy.  We can then see whether consumers perform better or worse under a socialized regime versus a private market regime such as ours.  

The resulting measures of consumer spending use the International Dollar as the unit of value after adjustment of their original currency.  Since the International Dollar measure is available benchmarked to 2011, I obtain the nominal measures (of consumer spending, exchange rates and PPP) in that year for each country.  The US dollar is the currency to which exchange rates and PPP adjustments are benchmarked and thus the US CE  needs no adjustment.   The adjusted results for others are presented graphically in Figure 1.  

Figure  1.  Annual Consumer Spending, Per Capita, in 2011 International Dollars

Note that the USA consumption spending value, at over $34,000 per capita, dominates the value of the other listed countries.  This is because our market-oriented economic system, has low household taxation, in addition to efficient and competitive markets.  This leaves the household with greater personal consumption opportunities.  

Since the Biden administration seems preoccupied with the welfare of black Americans, I use the example of black Americans to illustrate this effect.  A measure of consumer expenditures per capita for black Americans is available from the Bureau of Labor Statistics (BLS). It is developed from Consumer Expenditure (CE) Surveys by combining surveys from the years 2010, 2011 and 2012.  I can compare it with the survey data for other countries which are in 2011 International Dollars.  

Based on CE data, combined from 2010 to 2012, black households’ annual expenditures averaged $36,149, which was 79.8 percent of their average income before taxes.  The average household size is 2.6 persons, with the result that US African Americans in 2011 enjoyed consumer expenditures per capita of approximately $14,000.  

Thus, the average black American consumer enjoys, by this measure, a standard of living that is in the range of 13 of the 42 nations studied, including Denmark, Norway, and Sweden, all of whom are social democrats politically.  This demonstrates that social democracy and its associated high tax rates limit private opportunities for a higher standard of living.  (Low income Swedes, for example, face a total tax rate of over 60 percent).  This finding also demonstrates that American households of all races would be better off supporting the adoption of private market reforms of markets such as K12 education and healthcare that suffer today from public sector mismanagement.

Sources: 

Reginald A. Noël, “Income and spending patterns among Black households,” Beyond the Numbers: Prices and Spending, vol. 3, no. 24 (U.S. Bureau of Labor Statistics, November 2014), https://www.bls.gov/opub/btn/volume-3/income-and-spending-patterns-among- black-households.htm 

OECD (2021), Household spending (indicator)

OECD (2021), Household disposable income (indicator). 

Police Shootings: Statistics, Opinions, and Game Theory

After the death of Mr. George Floyd at the hands of Minneapolis police officers, the press emphasis on the race of the victim was immediate.  The death was, to many, confirmation that that there was a consistent pattern of biased treatment of black individuals in encounters with law enforcement.  The Floyd incident did not involve a shooting; Mr. Floyd died while being restrained through a knee-hold by the involved officer.  Nonetheless, press accounts tended to conflate the event with the police shootings issue.  

The event sparked protests and riots in 550 cities and damages (according to insurers) of $1 billion or more.  Although the cruelty of the Floyd event may have been enough to spark such a response, it seems likely that the representation of police shootings as evidence of persistent and structural racial bias played a key part.  The press accounts of the statistics of policy shootings was draw from numerous sources, but relied significantly on the use of the Washington Post (WP) newspaper’s shootings database.  For example, the infographic in Figure 1 was produced and widely disseminated by the Statista service.  It used data from the Washington Post shootings database from 2015 through May 28, 2020.  

Figure 1.  Infographic on U.S. Police Shooting rates, by Race, June 2020

As the graphic indicates, the total number of police shooting deaths, by race, in the 2015 to 2020 time span of the database, averaged approximately 1,000 per year.  Notably, there were almost twice as many White as Black shooting victims.  However, Statista normalized the rates across race by dividing the absolute number of deaths by the estimated population of each.  The graphic then reports the rate on a per million population basis.  (Note:  Statista allows reproduction of its infographics as long as proper attribution is made to the company.)

As a result, the rate for Black victims is nearly three times that of White persons and almost 50 percent larger than for Hispanic persons.  Although use of a per capita or population averaging scheme is common, it is usually employed when population is the factor most likely to generate variation that needs to be accounted for.  For example, when studying the importance of the restaurant industry by city, it makes sense to adjust for the size of the individual cities’ by population.  This is because population is likely a main determinant of demand for restaurant services.  

This is not so in the context of police shootings.  Police actions occur in the setting of violent activity and affect very specific populations.  That is why the per capita involvement in violent victimization settings is very different by race, as revealed by the violent victimization survey of the Bureau of Justice statistics (BJS).  

According to the 2010 to 2015 BJS survey, the per capita violent crime rate—the number of violent crimes committed by persons of a given race divided by its population—is very different by race.  That of Blacks is 950 percent that of Whites.  That of Hispanics is about 140 percent of that of Whites.  This is contrary to the measure presented in Figure 1 which implicitly assumes that police contact with the citizenry is random across the entire population.  When this is incorporated in an infographic such as Figure 1, a very different picture inevitable emerges.  Specifically, it appears that almost exactly one person is killed for every thousand persons of a given race, irrespective of whether their race is Black, White or Hispanic.  

Figure 2.  U.S. Police Shooting rates, by Crime Rate by Race, June 2020

This result is contrary to the widely accepted notion represented in Figure 1 which implies a significant tendency toward police shooting of black individuals.  It is likely that the Statista analysis, which likely was widely used in press reporting and internet communications, amplified the stereotype of police bias against minorities.  The simple per capita approach is commonly used by others, such as PoliceScoreCard.org (2021).  

The Statista analysis, by using a simple, population adjustment to the raw statistics, is of no practical use in evaluating the underlying issue of racial disparity in police shootings.  The implication of Figure 2 is that the crime rate—by itself— is an important determinant of police behavior.  The finding of a nearly identical shooting rate by race across the three races says that evidence of racial bias in police shootings has to be sought elsewhere. 

To that point, there are other studies that report finding bias using other data or using other methods, such as Ross (2015).  Other studies focus on other dimensions of the interactions of civilians with the police, such as vehicle stops and searches, use of handcuffs, use of non-lethal methods, and specific circumstances such as whether the civilian was armed or not.  There are also studies that use shootings data that report finding little or no bias, such as Johnson et al. (2019), and when police decisions to shoot are studied via simulations, such as Correll et al. (2007).  

The ambiguous state of the literature is because of the ambiguous nature of the phenomena being studied.  An encounter of a civilian and a police officer is a classic instance of what economists call a “game theory” problem.  Specifically, an active encounter of a putative criminal with police puts the two parties in a setting that triggers brinkmanship behavior.  The putative criminal has a goal of besting the police in order to gain a positive outcome (getting away with a monetary reward or freedom from some punishment), while the police hopes to best the criminal and thereby be rewarded by preserving personal or citizen safety, life or property.

The escalation of effort is the path to one party prevailing.  However, this escalation is what makes extreme outcomes like killing your opponent likely.  This is because neither party understands fully (a) what the other party has at stake or (b) how extreme the other party will act.  As the economists Dixit and Nalebuff point out in their research on strategic behavior, this uncertainty or risk raises the likelihood of catastrophic events even when the mutual intent of the parties is to act rationally.  Put differently, the two parties have to use what information they have or can detect in the behavior of the other to disambiguate what is likely to happen.

It is naïve to think that the parties lack some statistical opinion of the likely behavior or capabilities of the other.  The dramatically higher violent crime rate of Blacks is part of the statistical baggage that police bring to the encounter, leading to an expectation of a more difficult interaction.  Similarly, if the surveys by the Gallup Center on Black Voices are accurate, Blacks have a 50 percent higher probability than Whites of having experienced police in their neighborhood, and fewer than 1 in 5 expects to be treated respectfully (versus 56 percent of Whites).  Thus, both parties are arguably in an already-escalated, defensive state when the encounter occurs.  

The implications for policy are not trivial.  Both groups have to exhibit different behaviors so that more conciliatory interactions are expected of each other.  The work of Corman et al. (2002) and Miller et al. (2004) using the experience of New York City in the 1990s is that increased police presence can provide both better service to the community and improve mutual familiarity of citizens and police.  

The one policy that seemingly will absolutely nothelp in this regard is unfunding and reducing police presence.  The surveys done by Gallup's Center on Black Voices reveal that, though there are important trust issues to resolve, most Blacks value a police presence.  Indeed, the Gallup survey report by Saad (2020) reveals that fully 81 percent of Blacks desire the same or greater police presence.  Unfortunately, the current unfunding programs seem to aggravate neighborhood crime levels and discourage retention of all police staff, including those for whom better community relationship development would be welcome.    

Sources:

Ross CT (2015) A Multi-Level Bayesian Analysis of Racial Bias in Police Shootings at the County-Level in the United States, 2011–2014. PLoS ONE 10(11): e0141854. doi:10.1371/journal. pone.0141854 

D. J. Johnson, T. Tress, N. Burkel, C. Taylor, J. Cesario, Officer characteristics and racial disparities in fatal officer-involved shootings. Proc. Natl. Acad. Sci. U.S.A. 116, 15877–15882 (2019)

https://policescorecard.org, July 2021.   “Key Findings, 8,768 killings by police, Based on population, a Black person was 2.9x as likely and a Latinx person was 1.4x as likely to be killed by police as a White person in America from 2013-20.  

Joshua Correll, Bernadette Park, Charles M Judd, Bernd Wittenbrink, Melody S Sadler, and Tracie Keesee, “Across the thin blue line: police officers and racial bias in the decision to shoot 

“ J Pers Soc Psychol. June 2007.

Avinash K. Dixit and Barry J. Nalebuff: Thinking Strategically, W.W Norton, pp. 205–222 (1991).

Saad, Lydia, “Black Americans Want Police to Retain Local Presence,” Gallup Center on Black Voices, August 5, 2020

Corman, Hope and Naci Mocan, “Carrots, Sticks and Broken Windows,” NBER Working Paper No. 9061 July 2002 

Miller, Joel, Robert C. Davis, Nicole J. Henderson, John Markovic, Christopher W. Ortiz, “Public Opinions of the Police: The Influence of Friends, Family, and News Media,” an independent report to the US Institute of Justice, May 2004 2001-IJ-CX-0038 

Update on Light Bulb Bans

For more than a decade we have all been lectured on the virtues of changing lighting technology.  The standard, tungsten (incandescent) lighting has been challenged by compact fluorescent lights (CFLs) and bulbs based on light emitting diodes (LEDs). Here is a typical, effusive projection:

CFLs are four times more efficient than standard, incandescent bulbs and last nine to thirteen times as long. If everyone bought just one CFL and replaced their old standard bulb, America would save $8 billion in energy costs, prevent the burning of 30 million pounds of coal, and save greenhouse gas emissions equal to two million cars. Convert all the bulbs and the savings would be in the tens of billions of dollars.

The US government Energy Star program makes similar claims:  

ENERGY STAR estimates that if efficient lighting were used throughout the country, the nation's annual demand for electricity would be cut by more than 10%. This would save ratepayers nearly $17 billion in utility bills.

Sounds good, but should there be a comprehensive ban on incandescent lighting?  The short answer is, "not necessarily". In fact, they make little sense in a cool climate, either from an energy conservation, environmental or consumer cost standpoint.  Ironically, the movement to ban incandescent bulbs is, in fact, in limbo as this is being written. The restrictions were to go into effect for all US states on January 1, 2020.  

But in October 2019, the US Department on Energy (USDOE) decided that the regulatory target--a so-called General Service Lamp (GSL)-- was not clearly-enough defined and, in effect, stopped the federal ban on incandescent bulbs.  State and local regulation of the GSLs is in limbo, with some states already restricting incandescents and others still planing to do so.  Some of these parties sued the USDOE, and the case is currently in the Second Circuit Court. This makes this update timely.  

The Forgotten Physics

A 60 watt incandescent bulb does, indeed, use about four times the energy to produce roughly equivalent illumination, in lumens, of a compact fluorescent (CFL) or an LED bulb. As the table below indicates, the lumens per watt of household size bulbs shows that a CFL provides about 40 more lumens and an LED 50 more lumens per watt.  Put differently, approximately 75 percent of the power consumed by the incandescent bulb does not produce light, relative to the two other bulb technologies.

In addition, relying on incandescent bulbs over time requires more bulb replacement.  A normal incandescent bulb is currently about a fifteenth the life of an LED, given the total lumen-hours of the respective technologies.  This means that one can save three quarters of one’s lighting energy budget by switching to LED lighting.  

However, contrary to the simplistic logic that energy that does not provide lighting is “wasted”, physics tells us that energy is conserved and does not simply disappear.  In particular, virtually all of the “extra energy” that is used by an incandescent bulb is dissipated as infrared radiation or convection heat. 

In other words, the incandescent light bulb is heating--as well as lighting-- the room.  Thus, if the lighting is in a space that must be heated, whether or not this energy lost is a "waste" or not depends upon the climate and heating conditions. If the house is heated, by a gas or electric furnace, the excess heat produced by the light bulb reduces the net demand on these heating systems. This is called the Heat Replacement Effect.  

Since three quarters of the energy of an incandescent bulb is available to replace the central heating energy, the economics of this effect can be large, even considering the higher number of incandescent bulbs required over the LEDs.  Over the 25,000 hour life of an alternate, cold LED lighting system, for example, the heat energy produced by the incandescent bulb (45 watts per hour) has a value of about $170 at 15 cents per kilowatt hour (assuming that to be the cost of space heating energy.  This is more than enough to eliminate the higher total cost of the incandescent.  

Thus, in cold and mild climates, at least, there may be no effect on either the cost of electricity to the consumer, or the amount of greenhouse gasses emitted in the production of the electricity used.  Indeed, since high latitude climates also are darker and require lighting, the incandescent bulb may be an effective way to deliver warmth closer to the user of the lighting system.  

On balance, in cool climates where buildings are heated during low-light seasons of the year, it is not at all obvious that a blanket policy of banning incandescent bulbs makes either economic or environmental sense. They may make sense in regions where additional air conditioning load would be required to offset the incandescent bulbs' heat, but those of us in the coastal northwest should think twice.  

Sources:

Shahzad, K. et al., (2015). Comparative Life Cycle Analysis of Different Lighting Devices, Chemical Engineeering Transactions, VOL. 45l

The Heat Replacement Effect, UK Market Transformation Programme, BNX05, Updated: 19/09/2007, www.mtprog.com 

Scott Anderson,  A state by state look at light bulb bans as of 6/30/21.  https://insights.regencylighting.com/state-light-bulb-bans