Andrew

With all the talk about the budget, deficit, and debt lately, I’ve been trying to understand how the US federal budget works. It hasn’t been easy. I haven’t found any comprehensive and even-handed analysis of how the government spends and taxes, so I have tried to collect the information I found into one place and give it some context. I relied extensively but not exclusively on information from Wikipedia (which has a very good page on the budget) and used additional readings to double-check it. I use fiscal year (FY) 2010 numbers except where indicated. I include a list of sources at the end of this post if you want to do your own research or check my facts. Please let me know if you feel I’ve made a mistake, left something out, or failed to explain something. I will continue editing to improve this overview. This post will focus on how the budget does work and I am working on a companion post about how I think it should work. I’ve tried, for the most part, to keep my opinions out of this one.

The post is divided into three sections: Big Numbers, Spending, and Income.

Big Numbers

I hear these big numbers all the time, but rarely do I hear the context that makes them meaningful.

US Gross Domestic Product (GDP) in FY2010: $14,508 billion(1; 1.2)

The biggest of the big numbers to which we reference all else.

Total federal spending for FY2010: $3,456 billion(23.8% of GDP)(1; 1.3)

23.8% of GDP is relatively high compared to recent historical averages. The average across the previous twenty years has been 20.3%, including the high 2009 level of 25%(1; 1.3). As far as I’ve been able to tell, the recent rise is attributed to increased social spending during the recession and its aftermath, stimulus programs, rising healthcare costs, and paying for two ongoing wars.

Total federal tax receipts for FY2010: $2,162 billion(14.9% of GDP)(1; 1.3)

14.9% of GDP is relatively low compared to recent historical averages. The average across the previous twenty years has been 18.1%(1; 1.3). The drop is generally attributed to a weak economy (meaning less income to tax) and tax breaks passed in hopes of stimulating the economy.

Federal budget deficit for FY2010: $1,293 billion(8.9% of GDP)(1; 1.3)

8.9% of GDP is extremely high compared to recent historical averages. The average across the previous twenty years has been 2.26%, including the high 2009 level of 10%(1; 1.3). The recent rise is due to the combination of decreased revenues and increased spending.

Total federal debt for FY2010: $13,551 billion(93.4% of GDP)(10)

93.4% of GDP is very high compared to historical averages. However, there are two points to be made about how to interpret this number. The first is that it is made up of two different kinds of debt; one is debt held by the public, which amounts to $9,019 billion(62.1% of GDP), and the other is intragovernmental debt, which accounts for the remaining $4,532 billion(18). Debt held by the public is the treasury debt held by private citizens, companies, and other governments and must be paid back or face a catastrophic default. Intragovernmental debt is the money that the federal government has borrowed from its own Social Security and Medicare trust funds. It is money that it has promised to its citizens, though changing the benefits paid in the future would wipe out some of these obligations(20). The second point is that if we compare our debt held by the public in relation to GDP with other countries, we look pretty good. Our 62.1% level puts us behind 11 advanced economies, including Japan’s 183%, the UK’s 85.5%, Israel’s 74.4%, and France’s 67.4%.(20)

Spending

Spending can be divided into two categories; mandatory spending and discretionary spending. Mandatory spending means payments required by law rather than spending decided each year in the political appropriations process, as discretionary spending is.

Mandatory Spending, 61% of total spending($2,112 billion)(2): Entitlement programs are based on paying for current beneficiaries with current tax revenue rather than current beneficiaries with the taxes that those beneficiaries paid in the past. This is what creates the scary ‘unfunded obligations’ argument that many people make when pushing for entitlement reform. At this point both Social Security and Medicare have built up substantial surpluses, though as more people retire, healthcare costs continue to rise, and because government has borrowed from these surpluses to pay for current programs, in the next decade or two the funds will run out under the current arrangement.

     -Social Security, 20% of total spending($706 billion)(1; 3.2): What is usually referred to as Social Security is Old Age, Survivor, and Disability Insurance(OASDI) and is a social insurance program. 53 million people received benefits in 2009(2). There is a large current surplus because historically we have payed far more into the fund than we’ve paid out, but future deficits are on the horizon, starting in 2037. Social security is not means-tested, meaning that all people who payed into the system receive payments from the government, based on the average of the highest 35 years of covered earnings (earnings from which the FICA tax was taken)(3).

     -Medicare/Medicaid, 22% of total spending($793 billion)(2): In 2009 medicare covered an estimated 45 million persons (38 million aged and 7 million disabled)(2). Medicare is a federal single-payer health insurance plan for the elderly, while Medicaid is a state-run and state/federal funded health insurance program for persons with low income and assets. Medicaid is means-tested while Medicare is not (anyone above a certain age is entitled to medicare coverage)(4)(5).

     -Other Mandatory spending, 12% of total spending($416 billion)(2): This category includes the Supplemental Nutritional Assistance Program, or SNAP (previously known as food stamps), unemployment insurance, and the Child Health Insurance Program(15). The number of Americans receiving SNAP benefits reached an all-time high of 45 million in May 2011(6).

      -Interest payments on publicly-held debt 6% of total spending($197 billion)(2): This number is lower than it would be at the moment due to the fact that we have historically low interest rates on our Treasury debt. This amount also does not include the non-cash interest expense of $118.5 billion, which the government owes to itself for borrowing from the Social Security, and Medicare, and other trust funds(The intragovernmental debt mentioned in Big Numbers)(2)(11).

Discretionary Spending, 39% of total spending($1,326 billion)(2): This category of spending basically includes ‘everything else,’ from defense spending to education to foreign aid. This is what the appropriations committees determine each year after a budget is requested by the president.

     -Defense, 19% of total spending($666.7 billion)(1; 3.2): This amount only includes what is spent through the Department of Defense(DoD) and does not include all defense-related spending. Non-DoD defense-related spending includes Veteran’s Affairs, Homeland Security, and Military aide(these are counted in the next category). One table on the Wikipedia page on defense spending shows that if you aggregate all defense-related expenses it approaches or exceeds one-third of all federal spending(7).

Military Personnel: $155.7 billion
Operations and Maintenance: $276 billion
Procurement: $133.6 billion
Research, Development, Test, and Evaluation: $77 billion
Military Construction: $21.2 billion
Family Housing: $3.2 billion
Other: $90 million

     -Non-defense discretionary spending, 19% of total spending($660 B)(2): The breakdown figures in this category may not be exact. I have not found a comprehensive set of numbers for non-defense discretionary spending, so most of the numbers I am using are from the Office of Management and Budget that relate to agency spending(1; 4.1). The reason that they may not be entirely accurate is that I’m not sure what spending has already been accounted for in previous categories, for example I haven’t included Health and Human Services here because their numbers clearly reflect Medicare and Medicaid spending. I have chosen some of the largest categories that I don’t think include already-counted spending.

Veteran’s Affairs: $108.2 billion
Transportation: $77 billion
Education: $64.1 billion(16) (This includes federal Pell grants)
- Elementary, Secondary, and Special education: $37.4 billion(16)
Foreign Aid (Military and Non-military): $45.2 billion
-State Department: $23.8 billion (most goes to foreign economic aid)
-Foreign military aid(22): $14 billion (2009 number, 2010 was likely less)
-Peace Corps budget: $0.4 billion(12)
—-Average Nicaragua PCV living allowance: $0.0000025 billion ($2,500)(21)
Homeland Security: $44.4 billion
Energy: $30.8 billion (includes $19 billion in nuclear energy, defense-related(1; 3.2))
Agriculture: $21 billion(1; 3.2)
NASA: $18 billion
Environmental Protection: $11 billion

Income

Pretty much just tax revenue plus one random $76 billion footnote.

Tax Income ($2,163 billion)(1; 2.1): The tax income received by the federal government can be thought of as a two-part calculation. The statutory tax rate times gross income, minus the tax credits, deductions, and exemptions, referred to as ‘tax expenditures’(8). Tax expenditures and loopholes explain the fact that the US has the highest statutory corporate tax rates in developed countries, but one of the lowest rates of corporate tax income(24). This is because corporations keep much of their profits out of the country or use tax exemptions in creative ways(19). One of the current proposals talked about by both major parties is to ‘simplify’ the tax code and lower tax rates by eliminating these tax expenditures for both individual and corporate income.

     -Individual income, 42% of tax income($899 billion)(1; 2.1): The US individual tax code has six different marginal rates and four brackets(individual, married filing jointly, married filing separately, and head of household). The marginal tax rate system means that each dollar is taxed only in the rate category in which is is earned. If a person made $10,000 in taxable income(meaning after credits, deductions and exemptions) in FY 2010 and files as an individual, then they would have paid 10% tax on the first $8,375 and 15% on the remainder. The marginal tax rate for an individual filer in FY 2010 looked like this(23):

• 10% $0 – $8,375
• 15% $8,376 – $34,000
• 25% $34,001 – $82,400
• 28% $82,401 – $171,850
• 33% $171,851 – $373,650
• 35% $373,651+

     -Social Security and Medicare taxes, 40% of tax income($865 billion)(1; 2.1): Social security and Medicare are paid for by FICA payroll taxes that total a combined 15.3% on the first $106,800 of income(though for FY2010 the tax was 13.3%)(3)(4). The tax is paid half by the employee and half by the employer(except in FY2010, when the employee got a slight tax break)(8).

     -Corporate income, 9% of tax income($191 billion)(1; 2.1): Companies with income above $50,000/yr pay about 35% tax on income minus exemptions, deductions, and credits(9). Though the statutory marginal tax rate is 35%, the effective marginal tax rate is more like 17.2% for the reasons discussed above(17).

     -Excise, 3% of tax income($67 billion)(1; 2.1): Examples of products or services subject to an excise tax include: alcohol, tobacco, gasoline and diesel fuel, coal, firearms, telephone service, and air transportation.(13)

     -Other, 6% of tax income($141 billion)(1; 2.1): Unemployment Insurance tax ($45 billion on employers taken from the first $1000, on average, of wages paid)(12), Estate and gift taxes ($19 billion in taxes taken from the value of assets upon their passing from one person to another by means other than sale)(8), customs duties($25 billion), and various fees (for use of national parks, for instance)(8).

Other Income: I stumbled upon this extra item and am not sure where to count it, but I don’t find it counted in tax revenue, so I’ll just mention it separately.

     -Deposits of earnings from the Federal Reserve ($76 billion): The Federal Reserve is required by law to return all profits from their transactions after paying a statutory 6% dividend to member banks for their capital investment(14).

Hope this is helpful! Thanks for reading, and don’t forget to comment below.

Sources

1. OMB historical tables (table indicated in citation: 1.2, 1.3, 2.1, 3.2, and 4.1)
2. US Federal Budget Wikipedia page
3. Social Security Wikipedia page
4. Medicare Wikipedia page
5. Medicaid Wikipedia page
6. SNAP Wikipedia page
7. Military Budget of the United States Wikipedia page
8. Taxation in the United States Wikipedia page
9. Corporate tax in the United States Wikipedia page
10. United States Public Debt Wikipedia page
11. Peace Corps website
12. Federal Unemployment Tax Act Wikipedia page
13. Excise Tax in the United States Wikipedia page
14. Federal Reserve System Wikipedia page
15. State Children’s Health Insurance Program Wikipedia page
16. Department of Education summary of discretionary funds
17. AEI Report Card on Effective Corporate Tax Rates
18. President’s budget proposal for FY2012, table S-1 Budget Totals
19. 5 Ways GE Plays the Tax Game
20. “Economists say U.S. debt may not be as high as you think”
21. This is my estimate for fun. Please do not quote me as an authority.
22. USAID Foreign Assistance Fast Facts: 2009
23. Income Tax in the United States Wikipedia page
24. High Corporate Tax Rate Is Misleading

I’m about as frustrated as the rest of the country as I hear about the stalemate in congress over raising the debt ceiling and dealing with our deficit and debt. I think that one of the reasons that the Tea Party and the fiscal conservative strand in the republican party has been able to gain so much traction in the last three years has much to do with the narrative clarity of their story. Government is inefficient. Inefficiency is bad. Therefore, government is bad. Freedom is good. Free markets epitomize freedom. Therefore free markets are good. The political left, meanwhile, seems mired in their arguments, full of piecemeal justifications, and unable to confront head-on the stripped-down logic of their opponents. My goal in this post is to try to point out the inconsistencies of the Tea Party’s logic and re-frame the discussion for the Left.

My arguments will follow this general sequence: Free markets don’t and can’t behave the way the Tea Party says they do. ‘Efficiency’ is a hollow concept as it is currently used and needs to be re-evaluated. Even freedom has been oversimplified and used as an ideological weapon rather than an ideal to work towards in practice. All of this means that the Left needs to challenge the Tea Party on their terms and assumptions and re-insert government into an efficient and freedom-pursuing solution.

Proponents of laissez-faire capitalism claim that the central strengths of free markets are their (theoretical) amorality, transparency, democracy, basis in individual freedom, and efficiency. Ask most economists and they’ll tell you that science and math back these claims up, but they will slip in that parenthetical fine print just as I did. The parentheses are what make free markets so slippery to pin down, but if we analyze what the reality of free markets are we can see that those two punctuations hold back a corrosive truth that, once released, eats through the foundations of the argument against government. Markets are fundamentally different in reality than they appear on paper and in the mathematical models. Here’s why:

Markets cannot be amoral because they are directed and influenced by people, who are fundamentally moral. Markets tend to favor certain outcomes because humans tend to favor certain outcomes. Markets cannot be separated from human systems, and therefore they cannot be considered amoral. Markets are not transparent because, as any economist will reluctantly grumble, there is no such thing as perfect information. Nobody can measure nor organize the information necessary to make perfectly informed decisions and there are myriad examples of individuals or groups warping or hiding information in order to cheat the system. Transparency is a nice idea, but it’s only that. Markets are NOT strictly democratic because democracy means one vote per person whereas markets mean one vote per dollar. Economic votes are cast by the people who control the dollars, so what would be a democracy given zero inequality is really an oligarchy in our current arrangement. The claim that free markets are based on individual freedoms seems to me to be basically true, with some qualifications involving the idea of freedom that I’ll deal with later on. Still, I accept that free markets are the best way to promote individual freedoms.

Now to efficiency. Markets can only be called efficient by a very particular definition of efficiency. If efficiency means that the greatest output is produced by the least input, then by golly markets (theoretically) are efficient. Leaving aside this particular parentheses, however, we can take issue with the definition itself and contrast this production-based definition of efficiency with a broader one: The means which most effectively obtain the desired outcome. All of a sudden we need to define the desired outcome. Implicit in free market economics is that the desired outcome is maximized production, but I propose that there are a few things that are more important than maximum production. Things like economic justice, equality, sustainability, and public goods like education, parks, peace, and security. I’m afraid that each of these things implies an inefficiency according to the production definition. Want justice? It’s simply not efficient to take care of the poor or nonproductive in society. Want equality? It just distorts incentives to produce and invest in order to maximize output. Like nature? It’s only another input that should be used to maximize production. Want public goods? Markets can’t really handle public goods because of the problems of controlling access and policing free-riders. No person that I’ve ever encountered really wants to give up on these important human values, which means that we should take a look at my expanded definition and work backwards.

Okay, so we want justice, public goods, nature, and equality as well as the freedom that comes along with ‘free markets.’ These are our desired outcomes. So what are the most efficient ways to achieve them? Well, it certainly appears that the free market economy is the best way to approach freedom, but how do we balance the benefits of free markets with our other priorities? Well, that’s where history has provided an answer. Societies organize themselves into political systems and make decisions to uphold their desired outcomes. That’s right, we’re talking about government. It turns out that, to go back to my definition, we want certain desired outcomes that cannot be provided by free markets and the most efficient way to achieve them is through government.

Wait a second. That’s the opposite of what the libertarians and fiscal conservatives have been saying.

Exactly. If we broaden our definition of efficiency beyond maximizing production to include the important human values that hopefully we all share, we can conclude that free markets are inefficient and government is the only solution.

Now, this does not settle the debate of ‘how much government is the right amount,’ but it does change the footing of the discussion in important ways. Now that we’ve concluded that government is efficient insofar as it helps us achieve our desired outcomes, we must define more exactly what they should be and how to measure and maintain them. This is where libertarians step in again and demand that we bow down to their god: freedom. Freedom is sacred and inviolable. Try to argue against freedom! Well, how about if I just bring to light the caveats that are often swept aside and ignored?

What is freedom, really? It’s something that’s not questioned much, but if we think about it we all know that freedom is kind of self-contradictory. Individual freedom needs to be curtailed or it will impinge on itself. If individuals are completely free to act as they wish, then they are free to limit the freedoms of others (say, by stealing or killing), thereby negating freedom. Freedom needs constraints to exist universally. True freedom comes from a system wherein individual freedoms are limited to actions that do not conflict with the freedoms of others. This will maximize current freedom, but we also need to consider the past and future if our idea of freedom is to go beyond a shallow abstraction.

I believe freedom needs a concept of justice to ensure that we don’t dismiss past atrocities as irrelevant and a sense of responsibility for the freedom of those to come after us. Because freedom has been violated in the past, we have historical injustices in addition to the current injustices of birth and fate to contend with. In order to pursue freedom generally, we need to limit some current freedoms to compensate for past denials. Policies like a progressive tax system, welfare for the disadvantaged, and restrictions on the power of money to control politics and society are aimed to do this. If we believe that future freedoms should be protected, then we need to make sure that what we do today won’t impinge on the freedom of others later on. We have to limit a bit more freedom to ensure that people don’t take advantage of natural resources for their own benefit, thus depriving others of the freedom to benefit from ecological diversity or clean air and water.

This logical sequence quickly puts the Ayn Rands out there in apoplectic fits because they see no end to the rationalizing away of our precious freedoms. Where will we stop? When the individual is subjected to the collective like an animal slave? When individuality, creativity, and innovation are crushed out of humanity?

Uh, no.

As I said from the start in my definition of efficiency, we only agree to the most efficient means to achieve the desired outcome. Since the desired outcome is not subjugation, we will not design a system that will lead to it. We agreed that our desired outcome included freedom as the central value, but now we can see that freedom in a meaningful sense requires limitations that can best be applied by a government. Additionally we agree that we need government to promote important values like justice, equality, ecological sustainability, and public goods. There is nothing totalitarian about ensuring that our government is strong enough to protect these values. The surprising thing is that by these understandings of efficiency and freedom, the left can turn the right’s argument on it’s head: government is perfectly efficient and is indeed the only efficient solution. To promote freedom we must compromise and limit freedom. More generally we need to clearly define what our desired outcomes are and show that government will be contained to effectively pursuing them.

My hope in this post was to undermine some of the ideological shouting matches that happen when we talk about the role of government so that we can discuss real solutions. There is still plenty to debate about, but let’s agree that both government and free markets are part of the solution and stop accusing the other side of hating either freedom or the poor. Unless we can find ways to talk reasonably about these issues we’re just going to keep filibustering, mudslinging, and wasting time and energy looking for short-term political tactical advantage.

Let me know your thoughts and comments on these ideas. It’s a work in progress.

Too frequently what happens when those on the left of the political spectrum debate or argue with those on the right is a dialogue that devolves into a shouting match. It’s understandable when so many of the issues are deeply personal and emotional, as the issues surrounding public unions are in Wisconsin. What I’d like to do here is pose a debate between what I see as the two dominant economic perspectives in American public discussion and work backwards to analyze the underlying assumptions and differences that too often go untouched. By doing this maybe we can gain a deeper understanding and basic respect for the other side and remember that very few people are truly unreasonable. I can’t claim to be perfectly objective here, though I respect what I understand to be each position. I welcome comments about whether you think I’m on the mark or if I’m missing important points. Here goes:

Left: Unions must exist to counterbalance the undue power that businesses have over workers. Capital is concentrated in the hands of few and those few determine the ability of many laborers to feed their families, access adequate healthcare, and lead their lives with basic human dignity. It is a fundamental right to be able to organize and voice opinions in the interest of human welfare. Unions are a right.

Right: Wait a second. Hold on. Where do you get this idea that businesses have undue power over workers? Are they forcing workers to take the jobs? Do they physically threaten workers to get them to accept lower wages? If they did, they would be breaking the law. The balance of power lies in the ability to freely choose. If a worker does not want to work for a particular wage, they may choose to go elsewhere with their services. If the wage is truly too low, then nobody else will accept it either, and the business will be forced to raise it. It’s a self-correcting balance that is only warped when one side is able to force workers to forfeit their wages in the form of union dues to support a cause they may not believe in, and force managers to make decisions that are not in the company’s best interest, which undermines the jobs of everyone involved. Not only do unions disrupt a perfectly fair balance of power between labor and capital, they reduce the freedom of everyone involved.

L: To claim that the power structure evenly supports both labor and capital through freedom to choose is to ignore the real world. In economic models, individuals may appear to have complete freedom to accept or deny based on price alone, but in reality individuals are living, breathing people. They need to eat, they need to have shelter, and they need to feel a baseline security in order to live with dignity. To equate the consequences of a waiting game between labor and capital would be to deny that laborers are human. That’s not to deny that owners of businesses aren’t human either, but by definition their position is one of accumulated resources, sources of credit and, in the current moment, an abundant and desperate labor force. If we don’t allow laborers to band together and create pressure commensurate to the pressure that accumulated resources can apply, there cannot be equality.

R: It’s easy to paint business owners as unfeeling and selfish hoarders of capital, but without individuals who take risks and put their livelihoods in the balance when organizing all the complicated factors involved in running a company we wouldn’t have the technology and quality of life that we have now. The stress and personal assets that are invested in making a business successful can’t be ignored just because it’s not convenient to think of owners as humans who are just trying to make their living. Besides, the way you describe the things that humans need to survive and be considered dignified human beings implies that each individual is owed these things by the mere fact of their existence. Who do you imagine should be required to provide these things for them, and by what right should they make that claim? Everyone should have an equal opportunity to earn the things they need, but they are not entitled to these things. The declaration of independence says that every man deserves the right to the pursuit of happiness, not the provision of happiness. If that were the case, then society and economy as we know it would break under the stress of an unproductive existence.

L: Claiming that workers have a right to be treated with dignity is not the same thing as saying that they deserve to be given something without earning it. It means that everyone has an equal opportunity to earn what they want. It is equality, not entitlement that workers demand. The pursuit of happiness referred to in the declaration of independence was a cry for equality in the pursuit of happiness. The poor and working class are simply much less able than the rich to pursue happiness. This is what needs changing through regulation, union bargaining and protections for the less powerful in society.

R: Workers already have equality in terms of opportunity and freedom; there is no need for unions to give them that. As I’ve already pointed out, workers are equally free to take an offered wage or decline it in favor of a preferable alternative. Unions decrease freedom, they don’t increase it. To say that pure equality is our goal, we could just take whatever hardworking and innovative people earn that put them ahead of the average and give it to those who have less. The problem with this kind of distributional equality is that it denies individuals the right to what they create and earn while rewarding those who do not contribute.

L: Workers do not have equality of opportunity because their choices are severely limited and controlled by systemic and environmental influences beyond their control. Influences that are much less limiting on the owners of capital. Additionally, your claim of pure distributional equality is not being proposed by anyone here. I also am arguing for the equality of opportunity to determine life outcomes. All workers want is to have the same power to decide for themselves how their lives will be shaped that those who have economic resources have. The rich don’t deserve to be more free than the poor just because they have more money. They may be able to buy more things, but their life chances need to be equal to everyone else’s. Without protections against the influence and power of those with resources the freedom of workers is threatened and limited.

R: Here’s where you’re mixed up. In the absence of physical force, the rich cannot ever be more free than the poor because intrinsically we are all equally free to choose between alternatives. Once we eliminated coercive and discriminatory practices by law, we saw to it that every person had equal opportunity to say yes or no to economic offers. Don’t want to buy a product? Don’t buy it. Don’t want to sell your labor at a particular price? You’re perfectly free to pursue alternatives of your choice. The rich may have more alternatives, but the freedom to choose between alternatives is absolutely equal across socioeconomic lines.

L: How can you say that freedom is equally distributed for all non-coerced people when you yourself point out that not all options are equal among people. If a poor person has two options; accept wages that keep them barely alive or reject wages and starve, how is that not coercion? How is that being able to ‘freely choose?’ If a rich person or a business owner faces the options to hire from a vast pool of labor or wait comfortably while skimming margins off of the accumulated assets that he or she has, how can we say that they are equally free? To claim that freedom and choice have nothing to do with the circumstances in which they occur is preposterous.

R: I can hardly believe that you do not accept that the basic definition of freedom is the ability to choose between alternatives without external coercion. The ability to choose freely between two options and the ability to choose between many options is philosophically identical. You seem to make freedom out to be a responsibility to provide the same options to everyone. Those who have not worked to earn their pay should have an equal right to buy what they want? No. Despite your attempt to define hunger as coercion, you cannot say that any external actor is imposing this choice. If you aim to show that if people choose certain actions that they may harm themselves, then you have proved nothing new. People are responsible for the actions that they choose, but as long as they were free to choose them, we have no further business intervening. Besides, we (especially through the government) tend to make things worse when we tell people how to use their resources.

L: First of all, coercion does not need to be perpetrated by an external, individual actor for it to be coercion. If there is a credible threat of harm or death that disproportionately affects one section of a population, even if it comes from a system rather than a dictator, then freedom of choice is not universal. You seem to ignore the fact that people are faced with widely varying life situations that sometimes preclude any realistic expectations that they can make good choices. Discrimination, historical injustices, poverty, nutrition and family situation are all factors that influence the ability of individuals to choose. Most of us agree that we should work against these influences that limit choice and freedom, but you seem to deny that poverty or affluence are legitimate factors to consider. The system is clearly unbalanced in favor of those with resources and the rights and protections for workers, consumers, the poor, and the marginalized are necessary to correct for the imbalance.

R: Well, I can’t deny you that the world is not fair. It turns out, however, that no matter what you try to do, you’re not going to make the world fair. If you try to warp the scales to support labor against capital, then it’s simply unfair in a different direction. What you’re claiming is that unfairness determined by some humans is better than unfairness determined by nature and individuals competing in a context of equal freedom. Humans have too many tendencies to abuse power over others to trust them with picking winners and losers. Better to ensure that there is no physical coercion and let everyone decide for themselves. You still haven’t given me an alternative definition for freedom, either. The beauty of freedom in the United States and an increasing amount of the world is that we can determine our own futures. Rags to riches is not just a fairy tale and there are countless examples of people changing their lives through making use of their freedom. As long as there are paths for every person to choose, we can’t be held responsible for those who don’t take them.

L: I’ll tell you what’s wrong with your definition of freedom is: you’ve mistakenly attributed a binary quality to choice. You claim that there are two types of system: those that impose a single option on everyone and those that ensure at least two options for each person. Either you have freedom or you do not. Our world is not black and white, however. Freedom is a spectrum and we need to work towards equalizing the choices available to people, not just making sure nobody’s being forced into a predetermined life. Given that not all people are born free, it is our moral responsibility to shape the institutions that order our lives, especially our economic lives, in order to correct the injustices that are inherent in the world. My definition of freedom is the ability to live with the dignity that is due to all people. Dignity is equality of life chances and opportunities. To have the choice only between starving and working for unfair wages is not living with dignity. If you believe in equal freedom for all, then you must believe in human intervention to work towards it. Unless we base our policies in a movement toward equal opportunity and dignity, we will never achieve true freedom.

R: You’re wrong. Human intervention is not necessary apart from the promotion of equality exactly as I have defined it. If we take your definition to be the true one, then we will end up taking money from those who earn it and giving it to those who don’t. Charity is great when it’s the choice of the person giving it, but if it’s against someone’s wishes it’s closer to theft. We need to think of freedom in its most basic, stripped down, natural form because it is most reflective of the human condition. You say freedom is the ability to live with dignity, but I say that freedom is dignity, plain and simple. The good news is that we can promote freedom while simultaneously creating the most wealth and benefit for everyone. As the efficiency advantages that free markets have everywhere continue to undermine wasteful economic decisions across the world, more freedom spreads into the dark corners. By taking my definition of freedom and sticking to it, we will end up with what you claim to be the right of every person. But if we try to intervene to create the situation that you say we must, we will inevitably bungle the whole job. Unless we start with individual freedom, we cannot end with equal opportunity.

It seems to be assumed in most discussions about economics and the role of the government that free markets are better than government regulation, but I think before that discussion can happen we need to analyze what we mean when we say ‘free markets.’ In their pure form (which is the only form that is truly ‘free’) they rely on several assumptions about human nature and reality that don’t reflect actual practice. On a macro level, free markets require perfect information and perfect competition in order to function as proponents claim they do(eg. maximizing both individual and collective economic opportunity). By perfect information I mean that every individual understands all of their economic options and knows their own short-term and long-term best interest. Perfect competition means that everyone is on the same footing in the beginning. Theoretically, we should all have the same advantages and the best (most efficient) competitor should profit most.

Neither of these requirements (perfect information and competition) exist in our world. The tendencies of information and advantages are to accumulate with the wealthy and privileged, who have in turn inherited their position via their place of birth, socioeconomic status, race, and sex. Unless we are to take these factors as the basis for what we think people deserve, we must change things. Freedom of opportunity is hailed as the great leveler to allow those without advantages to still have a chance to change their destiny, but to accept this freedom as a given and to ignore the work that must be done to improve and maintain it is to live in a delusion.

Not only are ‘free markets’ a myth, but they are a myth that perpetuates the system itself by defining the debate as between freedom and regulation. This rhetorically powerful label of ‘free’ is used as a blunt object against those who argue for unregulated markets, but it does not reflect reality. I don’t believe in the cut-and-dry class struggle view of Marxism, but it is clear that ‘free market’ is a misnomer.

There is no such thing as free markets, nor will there ever be. There are only biased markets, and biased markets must be regulated by society in order to preserve justice and equality.

I’ve been thinking around the relationships between free markets, efficiency, and sustainability lately. I hope to come back to discussions of food production and sustainability soon, but for now here are some of my thoughts about efficiency:

First, I started to tease apart what is really involved with the term ‘efficiency’ apart from our common usage of it. Princeton’s online ‘wordnet’ has a nice, succinct definition of “the ratio of the output to the input of any system.” Another, less scientific way to state it seems to be ‘the best means to attain the desired ends.’ This iteration highlights the normative judgments implicit in our everyday use of the term. Efficiency in its technical sense defines the inputs to maximize outputs, whether that be production or destruction. The atomic bomb is the most efficient means to kill large numbers of people, but our goal should not be to destroy life. When we use efficiency in the economic sense, we generally refer to utilizing resources such that no more output can be got from them without additional input. Though the language is slightly different for each of these definitions, ‘outputs’ has the same meaning as ‘desired ends,’ just with different connotations(outputs=value neutral, desired ends=normative).

Complications arise because in reality, ‘outputs’ of a system are complex and value-laden, and ‘inputs’ are limited by our institutions like laws and social norms. For example, in industrial production, it is efficient from the perspective of a business to pollute the environment, because it reduces the resources necessary to produce a given product. This highlights the fact that one person’s efficiency is another’s inefficiency. If the desired goal is environmental preservation rather than material accumulation and production, the industrial approach is perversely flawed. Different end goals drastically change the means used to achieve it. We don’t want pollution, so we ban it. This is a way to preserve the freedom to clean air and water. In the face of subjective goals and complex means, we have developed the institution of free markets to guide us. So what do free markets mean for the desired ends and appropriate means of production?

Free markets ideally determine production and consumption decisions based on supply and demand. This means that the aggregate demand will set the desired ends of production, and aggregate supply will use the fewest means to produce and deliver them. In Adam Smith’s conception, the ‘invisible hand’ will guide individuals acting in their own self-interest to create a socially optimal outcome. However, problems arise from individual interest conflicting with social goods like environmental quality and equality. Self-interested individuals don’t value future generations’ well being appropriately because their ‘self’ will not exist. They also don’t value common goods correctly because the benefits accrue to the individual while costs are spread across many people. Individuals have additional nasty tendencies to discriminate, hoard, and cheat in their attempt to satisfy their wants. People often want to increase their own freedom and resources at the expense of others’. Allowing aggregate demand to determine the ends upon which we define the efficient means thus presents significant problems.

The other important component of free markets is the supply side. If we allowed producers to use whatever means are most efficient to produce what is demanded, we would have collusion, monopoly, and pollution whenever the companies could get away with it. We try to regulate the production methods of companies to stop them from reducing the freedom of others to produce or consume. The problem with regulation of free markets is that there are nearly infinite possible ways of producing goods, so to attempt to ban certain kinds or categories of production always leaves other options to circumvent the bans. Regulations are necessary to protect freedom, but will always be one step behind companies looking out for number one.

Thus, efficiency as determined by free markets is not always desireable! Aggregate demand has inherent mistaken tendencies, and aggregate supply has an inherent bias toward circumventing regulations intended to protect the freedom of individuals and society. Yet, free markets are held aloft as the most efficient pattern of organization as if efficienty were an end in and of itself. Efficiency is just a MEANS to and end. We as a society and individuals need to define the ends that we want, and then structure markets to respect those goals. Innovation is best achieved through self-interested incentives, but hopefully we also want equality and freedom for ourselves and future generations. If this is the case, we have some serious re-thinking to do about the efficient means to achieving these ends are, and they most certainly aren’t pure free markets.

Michael posed another challenge to my assertion that there are serious problems with the current food production system by pointing out that our current system produces enough surplus to make us one of the largest grain producers and exporters in the world. He argued that if we took my advice and reorganized our food production system using more local agriculture, then we would essentially be starving the world through our selfish need to take better care of the environment. I brought up some counterarguments at the time, and now I will revisit them and expand upon them further.

The current industrialized and globalized food production system has enough flaws to warrant a complete re-thinking of its structure. The way we produce our food is unsustainable, inefficient, unequal, and unhealthy. It is unsustainable because of the damage it does to the environment, inefficient because of the energy intensive processes used in modern farming, unequal because its distribution is based on who can pay for food instead of who needs it, and unhealthy because by responding to high profit margins the food processing industry has helped create an obesity and diabetes epidemic.

The unsustainability of industrial farming is demonstrable on numerous counts. One is soil quality erosion due to intensive farming and high use of fertilizer that provides only some of the nutrients necessary for plants¹. About 90% of US cropland is losing soil at an unsustainable rate². Another is pollution from the run-off of the nitrates used to fertilize the plants. This already causes areas of oceanic ‘dead zones’ that are larger than the state of Oregon³. Another problem is the cultivation of genetically engineered single-crop, or mono-crop, fields that are decreasing genetic diversity and necessitating massive outlays of chemical pesticides to maintain. With loss of genetic diversity, our ecosystems lose their ability to adapt to changes in the environment and genetically modified species risk wiping out natural biodiverity through cross-pollination and species destruction⁴. The chemical pesticides used on these crops are their own separate problem, causing increases in carcinogenic exposure⁵, surface and groundwater contamination⁶, and social costs of up to $8 billion dollars per year⁷. We should focus on sustainable levels of production with respect to earth’s carrying capacity, something that our modern production system does not do.

The inefficiency of modern food production may come as a surprise to those who are accustomed to thinking of the ‘green revolution’ as a major advancement in the efficiency of farming. The problem is our implicit assumption that increases in production is the same as increases in efficiency. This could not be farther from the truth. What has changed in agriculture over time has been the energy input into the system and technological innovations that accompany the energy inputs. The availability of synthetic fertilizers and pesticides has allowed farmers to increase yield per acre by pumping nitrogen into fields and developing vast monocrop farms that are dependent on synthetic pesticides to sustain. A study done in 1974 shows that energy inputs into the food system have far outstripped the energy output. The ratio rises dramatically from close to 5:1 to over 10:1 in energy input to output, which includes the energy used on the farm as well as in processing, transportation and consumption⁸. Another more recent paper reviews current literature on total factor productivity of modern agriculture and states that “In virtually all studies on industrialized-country agriculture, the analyses showed diminishing returns of productivity to increases in energy-intensive inputs.”⁹ We are simply using up earth’s stored solar energy in the form of fossil fuels and biological capacity in order consume in the short term. This arrangement is not only wasteful, it is irresponsible to every subsequent generation of living organisms on our planet.

The inequalities inherent in our current system have to do with resource distribution. Humans already produce almost 2800 calories for every person in the world, yet according to the WHO over 3 billion people are malnourished (the largest number and proportion in history)¹⁰. The trends inherent in globalization include specialization, economies of scale, and global supply and demand. Unfortunately for the poor of the world, this means that they often become dependent on fluctuating foreign markets for income, they compete with rich countries that export subsidized food, and compete with developed countries who can more easily pay for the food(Japan purchases between a quarter and a third of all US corn exports¹¹) . With the rise in meat production resulting from a rise in incomes in many developed and developing countries, more and more resources are going to feed animals rather than people. “The amount of grains fed to US livestock is sufficient to feed about 840 million people who follow a plant-based diet¹⁰. The energy input for animal protein is approximately 11 times that of grain production of equivalent protein¹⁰, yet because meat can be produced cheaply and sold to rich consumers, resources are allocated accordingly. One factor that contributes both to cheap livestock production and to unfair global competition is US farms subsidies. These subsidies may represent a decrease of 15% in costs for domestic livestock producers¹². A reconfiguration of these incentives must happen for equality in food production and distribution to be possible.

Finally, the health consequences of our modern food production and distribution system are nearly all-pervasive. Industrial food production contributes to: significant greenhouse gas emissions¹³; incentives for processed food that decrease nutritional value¹⁴; carcinogens⁵, pesticides, and bacterial outbreaks¹⁵; the ubiquity of high fructose corn syrup in soft drinks has been linked with the diabetes epidemic among children¹⁶; and the proven damage that global warming is causing and will cause to human life are all symptoms of the misallocation, misplaced incentives, and insensitivity to ecological principles inherent in our world.

The facts are difficult to grasp all at once. It is hard to believe that modern production could be so problematic when each step of the way has seemed fairly rational at the time. To make sense of all of these failings means acknowledging that humans cannot treat the earth and one another as means to the ends of accumulation and wants satisfaction. We need to re-evaluate our priorities and make sure we take care of our fellow human beings before we focus on building yachts and raising sirloin steaks for the rich. We need to respect the ecosystem that surrounds us instead of plundering it and wiping out irreplaceable species and resources. We need to think about our choices and find ways to change our world to reflect what we believe. Future posts will attempt to outline how we can make some of those changes.

1 Doran and Zeiss. “Soil Health and Sustainability: managing the biotic component of soil quality.” Applied Soil Ecology 15 (2000) 3-11, http://www.extension.umn.edu/distribution/cropsystems/components/7402_02.html
2 Pimentel et. al. “Environmental and Economic Costs of Soil Erosion and Conservation Benefits.” Science vol.267. February 1995.
3 http://www.nytimes.com/2008/08/15/us/15oceans.html?_r=1
4 http://www.actionbioscience.org/biotech/sakko.html
5 http://pesticides.montana.edu/PcideProfiles/carcinogens.htm
6 Gallagher et. al. “Ground water discharge of agricultural pesticides and nutrients to estuarine surface water.” Ground Water Scientists and Engineers. Winter 1996.
7 http://www.cnr.berkeley.edu/~agroeco3/modern_agriculture.html
8 Steinhart and Steinhart. “Energy Use in the U.S. Food System.” Science Vol. 184 pp 307-316.
9 Naylor, Raymond. “Energy and Resource Constraints on Intensive Agricultural Production.”
10 Pimentel and Pimentel. “Sustainability of meat-based and plant-based diets and the environment.” American Journal of Clinical Nutrition 78(2003).
11 2010 World of Corn Statistics Book. http://www.worldofcorn.com/pdfs/WOC-Stat-Book-SinglePG.pdf
12 http://www.agobservatory.org/library.cfm?refid=88122#search=%22major%20costs%20livestock%20farmers%22
13 http://en.wikipedia.org/wiki/File:Greenhouse_Gas_by_Sector.png
14 http://www.theatlantic.com/business/archive/2010/01/why-is-american-food-so-cheap/33259/
15 http://news.google.com/newspapers?nid=1696&dat=19971222&id=ogsbAAAAIBAJ&sjid=CEgEAAAAIBAJ&pg=2785,3132169
16 http://clinical.diabetesjournals.org/content/20/4/217.full, http://www.princeton.edu/main/news/archive/S26/91/22K07/

This will be the first part in a series that I hope to do about globalization, food production, and sustainable economic development. I’m titling them ‘Response to Michael’ because these thoughts were brought together in a great discussion/debate one evening about the pros and cons of the globalization of food production and capitalism in general. My friend Michael brought up some challenging arguments and prompted a stimulating conversation and a number of ideas that I’ve since been wrestling with. I hope to receive comments and feedback in order to continue to develop my position on the issues and hear criticisms from those who hold different opinions.

Challenge 1: Why take up globalized and industrialized food production as a cause rather than other kinds of globalization?

This question took me by surprise and I had trouble articulating a response at the time, but after giving it more thought, I feel like I can better explain this choice. The quick and dirty answer is that the food production system is the one that is most tied up in our natural environment and the least responsive to market pricing, leaving it particularly vulnerable to exploitation and degradation. In addition to these risks, food production is absolutely essential to basic human survival and engenders issues of fundamental rights, which hold more weight for me than luxury goods and light/heavy manufacturing do.

In our discussion I cited waste, inequality, and perverse incentives as particular threats to nature and humans that also often apply to globalization in general. My focus on the food production industry has largely to do with its interactions with the biosphere upon which all of human kind depends. First of all, mass production of food is a kind of contradiction in terms. By treating ecosystems that have evolved over millions of years as if we can isolate inputs and outputs just as we do in factories, we unlearn a great deal of human knowledge about the complexity of natural systems. By choosing the particular genetic components that fit our industrial needs, we are putting genetic diversity at risk and using much more pesticides and herbicides to protect the resulting crop vulnerabilities. Also, by using fossil fuels in our inputs, we have gone from getting two units of food energy for each unit of input energy in the 1940s to one unit of food energy for every ten units of input energy today (1). This inefficiency is a product of the industrial food system we currently depend on. Sure, we can get a lot of food that way, but at what costs and for how long?

Secondly, by allowing global markets to determine food production we remove the local incentives protecting environmental resources from being exploited. Once global food producers own land in foreign countries, they care only about sustaining the transfer of food from one area of high supply to another of high demand, not the conditions of the agricultural area. In this way, our consumption of foreign foods may contribute to soil degradation, pesticide runoff, livestock waste pollution, and the social dislocation of family farmers thousands of miles away without it affecting us at all. We protest the moment a company pollutes in our backyard, but by consuming hundreds of products produced elsewhere we are effectively outsourcing our waste. This may sound at least efficient (as long as those living around the waste are willing participants) but even if that were the case, the interconnectedness of global ecological systems means that individual choices are removed from the collective impact. This is a classic common resource pool paradox. Additionally, the outsourcing of commodity crops leads to dependence on volatile foreign markets that leave developing countries and less diversified farmers at risk for economic catastrophe, as occurred in the coffee crisis of the late 1990s.

Third, by managing our food production systems on market values like efficiency and economies of scale, we subject nature to market valuation. The problem is that markets are not accurate at putting a price on nature, even if it could theoretically be done. Nature is too complex, for one. Scientists don’t know how many species we can lose or how much CO2 we can emit before a tipping point is reached (in other words, there is a problem of unknowable information; a death sentence for efficient markets). Another problem is that markets do not have a mechanism for limiting the scale of production. The earth has a finite set of resources, and markets have no way to keep to a sustainable level. In fact, when resources become scarce, markets assign a higher value, thus making it more profitable to exploit the precious few resources remaining (2). Furthermore, these problems assume that nature has no intrinsic value to begin with, and that the only legitimate value they have is in relation to human use, which is a whole philosophical discussion in its own right.

Finally, there are a number of perverse incentives and misconceptions about food and food production in the modern era that are important for human health and environmental sustainability. Government involvement in agriculture has been torn between focusing on national food security and satisfying the powerful food lobbies, which has given rise to inefficient subsidies and waste. Modern food production prioritizes the food that has the highest profit margins, which generally come from low-cost and nutritionally empty ingredients that are processed into junk food. The marketing dollars poured into processed food advertising is proof enough that our priorities are skewed: Food, beverage, candy, and restaurant advertising expenditures weigh in at $11.26 billion in 2004, versus $9.55 million to promote the California and federal ’5 a day’ healthful eating program (3). Along with this massive marketing push for processed food, we have seen an obesity epidemic grow to dangerous levels; clearly an undesirable outcome.

There are a lot of problems with the modern food production system, and the US system in particular. Capitalism gets a lot of things right, but it gets food wrong.

1: Sexton, Steven.”Does Local Production Improve Environmental and Health Outcomes?” Giannini Foundation of Agricultural Economics. (www.agecon.ucdavis.edu/extension/update/articles/v13n2_2.pdf)

2:Gowdy, John and Carl McDaniel. “One world, one experiment: addressing the biodiversity-economics conflict.” Ecological Economics 15 (1995) pages 185-186.

3: ConsumersUnion.org at http://www.consumersunion.org/pub/core_health_care/002657.html

I’ve moved from my previous blog location to this one, hoping that the readability of the site will be more pleasant for anyone who chances upon it.

The concept of fairness and justice is a slippery one when it comes to economics. Especially loaded seems the phrase “I earned it.” This is invariably the defense of the wealthy and entrepreneurial classes for their comfortable material status, but the term ‘earn’ is unclear. In some contexts ‘earn’ could simply mean what one gets from a particular action. Someone can earn a medal by performing well in a race, for instance. But what if the person received a head start? Did they really earn it then? They still received it, if the judges gave it to them. This highlights the other, many times unspoken, implications of the term ‘earn,’ having to do with moral claim.

Moral claim is more complicated because it presupposes equality in means or opportunity for those who desire something. A lottery winner has a legal claim on the winnings, but random chance hardly seems like the basis that we would want to choose for determining who ‘earns’ something. We like to attribute it to effort and work ethic and creativity, but in reality, it has a lot to do with the color of our skin, our sex, and the wealth and education of our parents. Even intellectual capacity and creativity is influenced by chance, though at least here we have a bit more agency than our material circumstances.

So what does this mean for economics? It means that the phrase ‘I earned it’ really only means ‘I received it through a combination of circumstances and personal effort.’ This may not feel accurate to those who look to justify their positions in society, but it is undoubtedly true. The arguments to be made after this admission regard to what extent a person has earned their position and what their responsibilities might be to other who have received less than they deserve. This is a very touchy and personal subject, but one that tends to get avoided for the sake of politeness and comfort. If we really want to be able to say that we ‘earned’ anything, then we’d better make sure that we come to terms with the head start that many of us have been given.