Periscope Depth

what I stand for, I mostly stand behind

So I saw this snippet of text about a squillion times last week, either in writing or in a video or in the image below:

click for larger version

Excerpting the important parts, in case you can’t see the image:

You built a factory out there? Good for you. But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory—and hire someone to protect against this—because of the work the rest of us did.

Now look, you built a factory and it turned into something terrific, or a great idea. God bless—keep a big hunk of it. But part of the underlying social contract is, you take a hunk of that and pay forward for the next kid who comes along.

I don’t want to unpack everything that goes into that sentiment. I’m not going to take sides on its accuracy or its implications. Right now, I just need to raise my hand from the back of the classroom and ask: this transactional theory of government? This notion that people get something out of the State and therefore they have to pay something back? You know that’s not how it actually works, right?

Yes, I know what social contract theory is, and I sat through civics class like the rest of you. I mean how the actual process works. The actual payment of taxes and the production of infrastructure.

Look: if I want to talk about how the Gap does business, I can do it a couple different ways. I can talk about the microeconomics of supply and demand. I can talk about the effect of advertising and marketing on stimulating demand for a product. I could talk about the macroeconomics of managing inventory at walk-in locations, or about the cost of domestic labor vs. sweatshop labor, or about the Fisher family’s strategy of maximizing market coverage by selling clothing under multiple retail brands (Gap, Old Navy, Banana Republic, etc).

But if I say the Gap is undermining the quality of American clothing, I’m no longer talking about the economic process of how shirts get onto shelves. I’m advancing a theory. Different people can interpret the same set of facts (the Gap company’s cost of labor, target audiences, profit margins) and come up with different conclusions. Maybe the Gap is undermining the quality of American clothing. Or maybe they’re liberating the casual “boater” style of the country club set of the 50s and 60s by disseminating it to the masses! Either works! If this were hard science, we could test whose theory were truer by making predictions and seeing which came to pass. Since retail is a soft science, and poly/cotton blends a softer science yet, all we can really do is yell at each other in academic quarterlies and obscure blogs.

(TL;DR: positive vs. normative analysis; for more, see my friend Jodi B.)

Elizabeth Warren, in the above quote, is making a normative statement. She’s saying, “People who benefit from infrastructure ought to pay to support it in a level commensurate to their benefits.” This is a great theory! I don’t object to it, stated that far and no farther*. But I worry that several of the people who’ve quoted her so enthusiastically do so not because she’s stating a great theory but because they think she’s stating some obvious fact.

Because she’s not. And I think we all know she’s not. You do not pay a tax bill itemized for services rendered. Citizens pay taxes, yes, and the revenues from those taxes (as well as capital on bonds) pay for infrastructure. But to suggest that one causes the other simply because one came before the other is bad science. Anyone who follows the statutory process with cursory interest knows that big projects are often – one might cynically say usually – agreed to before the revenue is obtained to pay for them. Anyone who follows the electoral cycle knows that rarely – one might cynically say never – are the regulators, government employees and contractors who lay out infrastructure the ones to get fired if it fails, barring some tragedy (the Ted Williams Tunnel collapsing on a commuter, etc). And a true crank might say that it’s not infrastructure that demands taxes, but in fact the other way around – that taxes demand infrastructure, that the machinery of taxation looks for ways to justify its existence, that the urge is to collect revenue first and then plan massive projects to validate the need for their revenues, thus proving to the constituency how great a representative you are (“Three new schools and two hundred new cops under my first term, and with YOUR help …”) by laying out ever more glorious projects that need ever more exorbitant levies to support them, to which no one dare object since the results can be documented in black and white numbers (“whaddaya, against schools or something?”), in an ever-increasing cycle of taxes and projects until we’re voting for Two Vast and Trunkless Legs of Stone for state Senate.

Of course, now I’m theorizing myself. You see how tempting it is! So let me limit it to what can be said for certain: taxes come in, capital flows out, but any accounting link between the two is spurious.

“The law isn’t justice,” wrote Raymond Chandler in The Long Goodbye. “It’s a very imperfect mechanism. If you press exactly the right buttons and are also lucky, justice may show up in the answer. A mechanism is all the law was ever intended to be.” The relationship between tax revenue and infrastructure should be taken with similar skepticism. I know we all want a government process that’s equitable and fair and transparent, but we should never let that distract us from the convoluted, brittle and wheezing mechanism that governs us already.

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* Though even if we stay within the garden of classical microeconomics 101, there are problems with this theory, first among them: in no other transaction is a person asked to pay exactly according to their benefit. Traditional price theory holds that, in a free exchange, I’m going to pay less than the benefit I expect to receive. I pay the orange farmer a quarter because I want the orange more than I want the quarter: I’ve got lots of money that I can’t eat. He sells me the orange because he wants the quarter more than he wants the orange: he’s got lots of oranges but he needs mortgage money. Both of us profit because we’ve made an exchange that benefits us both.

If the farmer were to track me down later, discover that I’d derived a dollar’s worth of satisfaction from his juicy orange and then demand another seventy-five cents, I’d slap him on the ear. And yet the social contract theory Professor Warren espouses suggests that, if I benefit more from a piece of infrastructure than I paid for it, I haven’t paid nearly enough.

Of course, marginal utility theory has Warren’s back on this, because if I get a dollar’s worth of satisfaction out of an orange and I only paid a quarter, that’s a lot of consumer surplus going uncaptured. In an evenly rotating economy, supply and demand should even out such that prices will reach an equilibrium where the benefit of an exchange is minimal. So maybe I’m not paying enough.

Of course of course, textbook economics is bullshit anyway. But it’s a useful bullshit. We are at least speaking a common jargon to each other.

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