Sowell_Thomas_-_Basic_Economics_-_5th_Edition_2014

important than B. This is the opposite of incremental substitution, in which thevalue of each depends on how much of each we already have at the moment, andtherefore on the changing amount of A that we are willing to give up in order toget more B. This variation in the relative values of things can be so great as to convertsomething that is beneficial into something that is detrimental, or vice versa. Forexample, human beings cannot live without salt, fat and cholesterol, but mostAmericans get so much of all three that their lifespan is reduced. Conversely,despite the many problems caused by alcohol, from fatal automobile accidents todeaths from cirrhosis of the liver, studies show that very modest amounts ofalcohol have health benefits that can be life-saving.{xi} Alcohol is not categoricallygood or bad. Whenever there are two things which each have some value, one cannot becategorically more valuable than another. A diamond may be worth much morethan a penny, but enough pennies will be worth more than any diamond. That iswhy incremental trade-offs tend to produce better results than categoricalpriorities. There are chronic complaints about government red tape in countriesaround the world, but the creation of red tape is understandable in view of theincentives facing those who create government forms, rules, and requirements forinnumerable activities that require official approval. Nothing is easier thanthinking of additional requirements that might be useful in some way or other, atsome time or other, and nothing is harder than remembering to ask the crucialincremental question: At what cost? People who are spending their own money are confronted with those costsat every turn, but people who are spending the taxpayers’ money—or who aresimply imposing uncounted costs on businesses, homeowners, and others—haveno real incentives to even find out how much the additional costs are, much lessto hold off on adding requirements when the incremental costs threaten tobecome larger than the incremental benefits to those on whom these costs are

imposed by the government. Red tape grows as a result. Any attempt to get rid of some of this red tape is likely to be countered bygovernment officials, who can point out what useful purpose these requirementsmay serve in some circumstances. But they are unlikely even to pose the questionwhether the incremental benefit exceeds the incremental costs. There are noincentives for them to look at things that way. Nor are the media likely to. A NewYork Times article, for example, argued that there were few, if any, “useless”regulations{107}—as if that was the relevant criterion. But neither individuals norbusinesses are willing or able to pay for everything that is not useless, when theyare spending their own money. No doubt there are reasons, or at least rationales, for the many governmentregulations imposed on businesses in Italy, for example, but the real question iswhether their costs exceed their benefits: Imagine you’re an ambitious Italian entrepreneur, trying to make a go of a new business. You know you will have to pay at least two-thirds of your employees’ social security costs. You also know you’re going to run into problems once you hire your 16th employee, since that will trigger provisions making it either impossible or very expensive to dismiss a staffer. But there’s so much more. Once you hire employee 11, you must submit an annual self-assessment to the national authorities outlining every possible health and safety hazard to which your employees might be subject. These include stress that is work- related or caused by age, gender and racial differences. You must also note all precautionary and individual measures to prevent risks, procedures to carry them out, the names of employees in charge of safety, as well as the physician whose presence is required for the assessment. . . . By the time your firm hires its 51st worker, 7% of the payroll must be handicapped in some way. . . Once you hire your 101st employee, you must submit a report every two years on the gender dynamics within the company. This must include a tabulation of the men and women employed in each production unit, their functions and level within the company, details of compensation and benefits, and dates and reasons for recruitments, promotions and transfers, as well as the estimated revenue impact.{108} As of the time that this description of Italian labor laws appeared in the Wall

Street Journal, the unemployment rate in Italy was 10 percent and the Italian economy was contracting, rather than growing.{109}Subsidies and Taxes Ideally, prices allow alternative users to compete for scarce resources in the marketplace. However, this competition is distorted to the extent that special taxes are put on some products or resources but not on others, or when some products or resources are subsidized by the government but others are not. Prices charged to the consumers of such specially taxed or specially subsidized goods and services do not convey the real costs of producing them and therefore do not lead to the same trade-offs as if they did. Yet there is always a political temptation to subsidize “good” things and tax “bad” things. However, when neither good things nor bad things are good or bad categorically, this prevents our finding out just how good or how bad any of these things is by letting people choose freely, uninfluenced by politically changed prices. People who want special taxes or subsidies for particular things seem not to understand that what they are really asking for is for the prices to misstate the relative scarcities of things and the relative values that the users of these things put on them. One of the factors in California’s recurring water crises, for example, is that California farmers’ use of water is subsidized heavily. Farmers in California’s Imperial Valley pay $15 for the same amount of water that costs $400 in Los Angeles.{110} The net result is that agriculture, which accounts for less than 2 percent of the state’s output, consumes 43 percent of its water.{111} California farmers grow crops requiring great amounts of water, such as rice and cotton, in a very dry climate, where such crops would never be grown if farmers had to pay the real costs of the water they use. Inspiring as it may be to some observers that California’s arid lands have been enabled to produce vast amounts of fruits and vegetables with the aid of subsidized water, those same fruits and vegetables

could be produced more cheaply elsewhere with water supplied free of chargefrom the clouds. The way to tell whether the California produce is worth what it costs to growis to allow all those costs to be paid by California farmers who compete withfarmers in other states that have higher rainfall levels. There is no need forgovernment officials to decide arbitrarily—and categorically—whether it is agood thing or a bad thing for particular crops to be grown in California with waterartificially supplied below cost from federal irrigation projects. Such questions canbe decided incrementally, by those directly confronting the alternatives, throughprice competition in a free market. California is, unfortunately, not unique in this respect. In fact, this is not apeculiarly American problem. Halfway around the world, the government of Indiaprovides “almost free electricity and water” to farmers, according to TheEconomist magazine, encouraging farmers to plant too much “water-guzzlingrice,” with the result that water tables in the Punjab “are dropping fast.”{112}Making anything artificially cheap usually means that it will be wasted, whateverthat thing might be and wherever it might be located. From the standpoint of the allocation of resources, government shouldeither not tax resources, goods, and services or else tax them all equally, so as tominimize the distortions of choices made by consumers and producers. For similarreasons, particular resources, goods, and services should not be subsidized, even ifparticular people are subsidized out of humanitarian concern over their being thevictims of natural disasters, birth defects, or other misfortunes beyond theircontrol. Giving poor people money would accomplish the same humanitarianpurpose without the same distortion in the allocation of resources created bysubsidizing or taxing different products differently. However much economic efficiency would be promoted by letting resourceprices be unchanged by taxes or subsidies, from a political standpoint politicianswin votes by doing special favors for special interests or putting special taxes onwhomever or whatever might be unpopular at the moment. The free market may