In Defence of Liberty

Driven by data; ridden with liberty.

Concentrated Gains and Diffused Costs

Imagine a law that would confiscate a penny from everyone in Britain and give it to one person. The proud new owner of £631,000 would undoubtedly notice the law’s effect, but the trivial amounts are too dispersed to arrest any taxpayer into action. The stamp on the letter to the MP, or the time spent writing an email, costs more than the tax itself, and the recipient would use their fortune to defend the policy. This law is a constructed example of concentrated gains and diffused costs. Policies such as quotas, strict regulation, minimum prices, subsidies and occupational licensure benefit a select number of incumbent producers, at the expense of their consumers.

Taxis are slightly more expensive for customers thanks to licenses, but this gain is concentrated in the incumbent drivers. (Photo: Bordas)

Taxis are slightly more expensive for customers thanks to licenses, but this gain is concentrated in the incumbent drivers. (Photo: Bordas)

For sugar, the United States has a potent concoction of loan rates, allocations, tariff rate quotas, with the Department of Agriculture purchasing ‘surplus’ sugar for ethanol production. Back in 1990, the Chicago Tribune reported that the sugar policy was “facing the most serious challenge in recent years”, and was costing “consumers as much as $3bn a year”. Returning to 2013, the policy remains just as sweet, with an Iowa State University paper estimating its customer costs in higher to be about $4bn annually. This amount is approximately $12.84 for every person in the United States, but represents millions for large sugar corporations. Many Americans may not even know about the programme. Defence of these policies is veiled in protecting a nation’s jobs, and hermetically sealing off ‘unfair’ competition, usually meaning subsidised companies in foreign lands. Jobs do not acquire nationalities, and the National Confectioners Association believes the scheme has eliminated “more than 14,000 confectionery jobs and more than 75,000 food manufacturing jobs” in the United States. If another nation directs their own taxpayers’ money to cheapen sugar prices, then consumers across the world will gain through those lower prices.

HS2 and AgustaWestland

HS2, the planned high-speed railway from London Euston across the spine of England, is another example, as the benefits will be primarily accrued by the contracted companies and London businesses, with a cost of £1,000 for every family in the UK, spread over decades. Specific companies, like AgustaWestland in Yeovil, breathe through government contracts. The reduction in public spending through seeking cheaper helicopters and aerospace equipment would be small for each taxpayer, so they would not be thankful, but those contracts represent familial livelihoods. Those families would be rather unforgiving if those contracts were reallocated, and AgustaWestland lobbies aggressively to retain its position as the Ministry of Defence’s preferred producer of helicopters.

More generally, the incremental increases in taxes and borrowing required to support inexorable spending are dispersed throughout the population, but each line of spending has concentrated prosperity, its recipient. There are few remedies to this political problem, as inheritors may have the time, money, specialised knowledge and lobbying power to continue their favourable treatment. Asymmetrically, citizens do not have the vast resources or particular information required to scour each scintilla of spending, but may object to its general level. This phenomenon helps illuminate why government spending escalates.

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One comment on “Concentrated Gains and Diffused Costs

  1. DP
    May 12, 2013

    Dear Mr Masters

    A very astute analysis. When I was a lad someone pointed out that if you could steal ten new pence (as they were in those days) from everyone you would acquire about £5.7 million pounds, with no comeback because no-one would waste their time chasing anyone for ten new pence, even in those days, when you could actually buy something worthwhile for two bob and get change.

    How to do it cost effectively?

    Get the government to do it for you.

    It gets better than that because you can reduce the take by an order of magnitude and still be well off – your one penny. At point one of a penny, £63 grand is a respectable salary for most people today. Point zero one of a penny – £6,300 – a worthwhile addition to anyone’s budget especially if one of the government’s favourite livestock, the idle poor. Indeed the rules ensure they remain idle: poverty traps do not design themselves.

    If the beneficiaries have to defend themselves from questioning and attack, they do not have to rely on the largess heaped upon themselves. They have the bottomless pockets of the taxpayer to draw upon, plus the resources of huge and skilled legal teams, all paid for by the taxpayer (of which class these folk are not a part, though they like to claim they pay taxes too: you cannot pay taxes out of taxes).

    If it looks like the taxpayers might win, the final recourse is for the government to be called upon to change the law so the government and its clients cannot lose.

    The idle poor and the idle rich sucking at the teat of government largess at whatever level they can achieve – 0.01p, 1p, 10p per British subject or above – are an essential part of the government’s economy: the government needs them to help it spend the taxes it collects. The tax take rises annually as a percentage of GDP; getting rid of it in a way acceptable to the taxpayers is a perennial problem for government, which is why government’s favourite clients get paid so well.

    What is the difference between government and organised crime?

    One is illegal.

    But neither is lawful.*

    DP

    * this refinement was added by a commenter to the answer to the question.

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