Wednesday, December 29, 2010

The cost of government: more than taxes

Mark Perry has a couple of superb posts up highlighting the amazing price declines and quality improvements of modern conveniences such as washing machines, televisions, refrigerators, etc. This phenomenon is, of course, so utterly commonplace that at first glance such an observation may border on the banal, with the inevitability of lower prices and improved quality ingrained in our collective psyche to such an extent that prospective buyers must often wrestle with whether to make a purchase now or hold off even for a few months to reap cost savings and new features.

Plenty of other areas of our economy, however, remind us that this is in fact an extraordinary development. The cost of health care has been rising at a fearsome pace, placing a tremendous burden on business through increased hiring costs and contributing to wage stagnation among workers. Inflation in higher education has been surging at an even faster clip, serving as a financial strain on millions more Americans. Housing prices in certain areas of the country -- primarily those on the coasts -- have witnessed substantial run-ups that remain elevated even after recent declines.

So what separates the two? Why are price declines and improved quality the order of the day in some industries but not others? The main difference is competition and government interference. While industries such as consumer electronics and bus service experience must contend with numerous competitors and receive no special favors from politicians, other industries suffer from various government distortions ranging from subsidies to stoke demand (college) to restrictions on competition (taxis, shipping) to regulatory hurdles (housing) or some combination of all three (health care).

When discussing government intervention in the economy, Republicans too often frame the debate solely in terms of taxes, and based on their rhetoric one could be forgiven for thinking that economic performance is simply a product of taxation levels. Although low taxes with minimal distortions are certainly a laudable goal and a contributing factor to growth, the single-mindedness with which tax cuts are pursued as an economic strategy shifts the spotlight away from the costs imposed by regulation and other misguided government adventurism. That's unfortunate, as previous exercises in deregulation such as the railroad, trucking and airline industries have both contributed to economic growth and reaped significant cost savings to consumers.

If putting more money in the pockets of taxpayers at a time of budgetary pressures is the goal, an agenda of deregulation and subsidy reductions would seem to warrant the attention of congressional leadership.

Related: Harvard economist Ed Glaeser points out the role regulation has played in encouraging people to move from areas such as the Northeast to the Sunbelt.

Update: Republicans are vowing to crack down on red tape.

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