On taxes and budgets - our social compact

The fundamental responsibility of state government is to provide a social infrastructure for its citizens. This is accomplished by raising funds via taxation and fees and then developing a spending plan to accomplish these goals.

A budget represents the priorities of the citizenry and includes various expenditures such as health and welfare, public education, judiciary and regulation, administration and finance, public safety, and transportation.

(This column is full of numbers and percentages and rankings. But this is what impacts your pocketbook and provides the services you demand. So pour a cup of coffee and settle in).

It is interesting to compare the spending by the various states (FY2015 – last year all data available).

Of the New England states, Vermont finds it necessary to devote over $9,200 per person while New Hampshire gets along fine spending less than half of that.

                                                Per Capita           National

                                                Spending             Rank

Vermont                                  $9,265                  11

Rhode Island                          $8,426                  13

Maine                                     $6,244                   21

Connecticut                            $5,681                   24

Massachusetts                       $5,372                   29

New Hampshire                     $4,284                   44

Rhode Island, while feeling that it can spend less per citizen than Vermont, is still well above the national average of $6,900. Massachusetts, on the other hand, is a decent bargain at 29^th place nationwide.

One of the brilliant features of our system of federated republics is that the states act as a “laboratory of democracy”. We can see what works and what doesn’t, learning from the best and avoiding the worst. (This is why all Federal mandates have a built-in negative consequence – eliminating the competition of ideas in that particular policy arena).

Vermont and New Hampshire have nearly the same area, though New Hampshire has twice the population. Despite the disparity in per capita spending, Vermont and New Hampshire both have high school graduation rates of 91% (excellent, by the way). They both rank moderately high in happiness, 13^th and 16^th respectively. And they both have a high life expectancy of over 80 years.

In terms of total tax burden, Vermont ranks 12^th nationwide with a burden of 11% while New Hampshire comes in 49^th at 8.5%. (Massachusetts is, again, quite frugal at 9.6%, ranking 40^th).

Vermont and New Hampshire, while at opposite ends of the spending spectrum, yield very similar quality of life results. There are likely some lessons to be gleaned here.

Rhode Island is another case. Its per capita spending is very high, ranking 13^th in the nation. It also comes in 6^th in total taxation with a rate of 11.6%. So what are the citizens of Little Rhody getting for their high tax and spend regimen?

Life expectancy is 79.9 years, only a touch below the New England leaders. But the happiness index ranks 41^st nationwide, a poor showing in exchange for profligate spending. The average public wage is $56 thousand, the highest in the region, but the home ownership rate is the lowest at 57%. And worse, the high school graduation rate of 84% is the poorest in New England. It seems that if Rhode Island wants to attract new businesses and skilled employees, they’ve got a bit of work to do.

Finally, in spite of a past legacy and reputation as “Taxachusetts,” Massachusetts is doing a solid job of fiscal management for her citizenry. Taxes are relatively low (as previously noted) and quality of life indicators are good. Life expectancy is over 80 years, happiness ranks 9^th nationwide, and the high school graduation rate is over 89%. While there is always room for improvement, these are respectable results.

What can you do, dear citizen, to determine how your money is spent? Just two things: inform yourself and vote. You would be joining a very small club of those who do both.

You didn't build that

In a recent NPR broadcast on the wonders of the human brain, we learned how researchers have been able to identify particular regions used for specific tasks and emotions. Such as the finding that people who are happy tend to have a larger precuneus, a structure also thought responsible for consciousness.

These are indeed miraculous times, that we can inspect our own brain and determine what makes us self-aware, what makes us feel happy, which regions might cause insomnia, and how we learn language. One scholar exclaimed of the mystery and power of a brain that is able to unlock its own secrets and understand itself.

After all, our brain is but a computer, composed of about 86 billion neurons. The African elephant has three times as many, but we rarely see scholarly articles published by elephants.

The secret, of course, is that we have evolved the ability to communicate, to both exchange and record complex thoughts. And that over time we have developed tools and technologies allowing us to delve into our physical world, to manipulate and understand its workings, including that of our own brain.

When a single researcher is bent on the task of fathoming the human brain, it is not only her brain focused on the task. She is benefiting from billions of fellow human brains that have, over many years, built a corpus of thought and research and tools and recorded knowledge. This is our unique human power.

Robinson Crusoe, stranded alone on his desert island, would have little chance of understanding the operation of his own brain.

In any human endeavor, it is the multiplication effect that makes our race so successful. Libraries full of research, universities training new generations, clever tools and machines and sensors probing our world, computers and networks facilitating communication, we amplify the power of our own measly 86 billion neurons.

In spite of the critical importance of this social infrastructure, individual brilliance is still crucial, cultivated, and revered. Albert Einstein, whose theory of ripples in the fabric of space-time was recently validated, stood on the shoulders of Copernicus and Planck and Maxwell. It’s as if this fabric of human knowledge and abilities forms a trampoline on which a brilliant, young, aspiring thinker might ascend to a new insight, a breakthrough, a flash of genius.

In this we observe the interaction and mutual interdependence of society and the individual.

“You didn’t build that” is a meme that has pervaded our recent politics. It is meant to diminish the significance, and hence the deserved remuneration, of individual contribution. Liberals use it as a justification for increasing the tax on success. Conservatives interpret it as an attack on the value of entrepreneurs and the free market.

In truth, both have a point. Tom Brady would not be fabulously wealthy without the social infrastructure that offers him a field of play. But we (at least those who are fans) would be the poorer for not seeing his brilliance on the field. Tom Brady is wealthy because we value the entertainment he provides.

Examples abound. Steve Jobs (rest his soul), was enormously wealthy but brought us our ubiquitous, dearly loved iPhones. Larry Page and Sergey Brin, each multi-billionaires, founded Google, an indispensable tool to billions of people every day. Mark Zuckerberg, another multi-billionaire, brought us the spectacle of silly cat videos and embarrassing spring break photos on our Facebook feeds. None of these folks “built that.” But “that” wouldn’t have been built, in this way, at this time, without them.

More quotidian examples surround us. For government employee, teacher, police, and fireman pension funds, those are invested in corporate America. The success of those companies, and the CEOs who lead them, is paramount to your retirement. Yet somehow it is fashionable to decry and punish that success.

Just as in science, society has evolved a commercial infrastructure upon which our entrepreneurs and business leaders create and implement their individual visions. It is true that trucking companies couldn’t be successful without public roads. But without trucking companies, the value of public roads would be diminished. And it’s also true that we must all contribute to the public fisc.

But we must never demean nor punish individual achievement, whether an Einstein, Zuckerberg, or Brady. Individuals need society, and the inverse is blindingly obvious. The trampoline is useless without the jumper.

A brief history of energy

The energy news in New England isn’t great. Electricity prices are expected to rise 9.6% this summer relative to last. The average cost of a gallon of gasoline in Massachusetts last week was $3.68, up 4% from the same period in 2013. In this recent brutal winter of polar vortexes, extreme, extended cold pushed our heating bills through the roof. And while natural gas at the central Pennsylvania hub was $3.37 per million BTUs, it was $24.09 in Boston. (This is due to a lack of pipeline capacity, a situation that towns along the northern tier of Massachusetts are striving to perpetuate).

Why the concern over energy prices? Because energy is at the very root of the economy. High energy costs destroy job growth, increase the cost of everything we consume, and act as a terribly regressive tax on the poor and middle class. Since you will be asked to make many decisions, both politically as a voter and commercially as a consumer, it is worthwhile to understand and consider energy carefully.

We are often presented with a menu of energy types with a dizzying array of sources. Wind, solar, hydroelectric, oil, natural gas, coal, biomass, nuclear, geothermal, tidal – and each with multiple variations, it’s enough to make your eyes cross. Let’s go back to basics.  

According to current thinking, the universe sprang into existence nearly 14 billion years ago in a blinding flash of pure energy. Within a fraction of a fraction of a second, this energy expanded in all directions, slowly coalesced and began to form matter. As we can tell from Hubble Space telescope images, great spiral galaxies formed, organizing and spinning and creating vast numbers of stars, each a microcosm of spinning planets and moons. The universe is a vast playground of energy, mainly star fusion and angular momentum (spin).

Let’s take a brief tour of our plethora of energy sources here on Earth.  

Solar. Our star, like all stars, creates heat and light from a process of nuclear fusion, where hydrogen atoms, under great pressure, fuse to create helium, thereby releasing energy. Deep within the star, heavier elements are produced in this enormous furnace, such as iron and uranium. Here on earth, we can collect radiated solar energy and convert it directly to electricity or use it for heating water. Solar energy is available, of course, only when the sun shines. Clouds and dark of night necessitate the use of storage or alternative energy sources.

Wind. Believe it or not, this is also fusion (solar) energy. The sun heats the land, the sea, and our atmosphere creating great currents of air. The wind blows because of the sun. If our planet hung in a dark, cold, void of space, there would be no wind.

Hydroelectric. Surprise, also fusion (solar). While some would say that this is gravitational energy, gravity is not an energy source. The water that falls must have been raised in the first place. As the sun evaporates water into the atmosphere, it eventually falls as snow or rain. Lifted by the sun, the water now flows through lakes and rivers and dams and generates electricity.

Fossil. Now you’re beginning to get it - also solar fusion. Over a billion years, the sun’s rays bathed the earth. Trillions of tons of bacteria and plankton and grasses and trees and animal life thrived, died, decayed, and became buried under hundreds and thousands of feet of rock and sand. Compressed and cooked, this biological mass stored the solar energy that originally created it in the form of natural gas, oil, and coal. Fossil fuels, because of their concentration, have an extremely high energy density which is why they are among our cheapest fuels.

Biomass. As the sun shines on corn or sugarcane or a number of other fuel crops, fusion energy is converted to organic compounds by photosynthesis. This stored solar energy can then be processed into fuel. This technology can also be adapted to bacteria and plankton. Biofuels have the potential to create cheap, plentiful fuel, but if we’re not careful, can compete with foodstocks thereby driving up food prices.

Nuclear. Yes, solar fusion energy, though not from our star. Other, older stars created radioactive elements which were incorporated into the crust of our earth when it was formed. We can mine uranium, for instance, to create power by nuclear fission. As we know from Fukushima, Three Mile Island, and Chernobyl, this presents risks. Properly managed, nuclear energy can provide vast amounts of power with no effluents other than radioactive waste (not to be minimized, this waste can be very dangerous). The holy grail of nuclear researchers is to create fusion reactors, the same as in the stars. This would be much safer and cleaner than nuclear fission.

Geothermal. Another byproduct of solar fusion. According to the Department of Energy, 80% of geothermal energy comes from the decomposition of radioactive elements in the earth’s crust (which originated in a solar furnace). The remaining 20% is residual heat from the formation of the earth 4.5 billion years ago. Geothermal energy can produce gases and pollutants from fluids withdrawn from the earth, but most geothermal plants contain emission control systems.

Tidal. There is great potential for capturing the energy of tidal currents for power generation. While opponents decry the potential impact on navigation and sea life, supporters proclaim the virtue of clean, sustainable power. Unlike solar energy, the tides run day and night. This energy source is not from solar fusion – it is much older. Look at the Hubble spiral galaxy image again. The amount of rotational energy stored in the universe is immense. Part of that energy is represented by the moon’s orbit around the earth, dragging the tides with it as it goes. Tidal energy is as old as the universe itself.

This is just a brief overview of energy and its sources. You owe it to yourself to become informed. Understand that all energy enterprises have risks and benefits. Become familiar with such concepts as reliability, renewability, and sustainability. Appreciate the impact of energy costs on jobs and the cost of living.

Energy is too important, too fundamental to our survival, to deserve less.

Economic principles are older than history

Economics is incredibly complicated, we are told.  Economists would have us believe so because, otherwise, why would we need them?  Politicians likewise prefer befuddled voters as they are easy to manipulate.  Our economic system is indeed complex because of its enormous scale.  But it is based on some very simple principles, and we can use them to understand fundamental relationships.
 

In case you hadn’t noticed, the global economy is in a funk.  Investors aren’t investing, bankers aren’t lending, consumers aren’t consuming, manufacturers aren’t hiring... what to do?

There is a debate raging on the choice between growth or austerity (reducing debt) to improve things.  By “growth”, its proponents mean public sector spending (hiring more cops, clerks, and teachers), funded by higher taxes or increased borrowing. Those on the other side say that austerity works just fine, thank you very much, it just takes a little longer.  And further, they argue, “growth” could and should be nurtured in the private sector – it need not be a codeword for public spending.

Public sector, private sector, spending, growth, debt, taxes… it’s enough to make your head spin.  What should we do?  How do we decide?

Let’s take a look at how economics began. Imagine a prehistoric tribe made up of ten individuals.  We will focus on the adults and ignore the children for now.  The adults  are divvied up as follows:

• 3 hunters
• 4 gatherers
• 1 shaman (active)
• 1 shaman (retired)
• 1 hunter (disabled)

The three hunters, as you might guess, track, pursue, and take game animals, large and small.  The four gatherers cultivate simple grains and vegetables and collect wild fruits and berries. The hunters and gatherers make up the private sector, as they produce the means to keep the tribe alive.  Their output feeds the entire tribe.

The shaman uses magic to forecast the future, cast spells on the tribe’s enemies, and teaches basic skills to the tribe’s children.  He makes up the public sector.

The disabled hunter, unfortunately, is no longer able to contribute because of a badly wrenched back from trying to haul a large elk.  The retired shaman, too old to prognosticate, and the disabled hunter are social beneficiaries.    

All of the grains, berries, rabbits and venison produced by the hunters and gatherers must be shared with the public sector (current shaman) and the social beneficiaries (retired shaman and disabled hunter).  Every rabbit, sheave of grain, and basket of berries must be shared ten ways, even though only seven are responsible for production. For every 10 rabbits a hunter snares, he must give up 3 to support the public and social beneficiary sectors. This is a tax.

Imagine that a prolonged drought results in poor yields for both hunters and gatherers… the economy is a mess.  People are hungry, starving, and something must be done.  So what is the logical conclusion… shall we hire another shaman from the tribe in the next valley?

That’s what some argue… that by expanding our public sector, economic output will be increased.  But we still have only 3 hunters and 4 gatherers, who must now share their output 11 ways instead of 10.  They are rightfully baffled by this decision, because there are now more mouths to feed but no increase in production to do so.

Does this mean that the public sector is bad and that we shouldn’t support those in need?  Absolutely not!  In our real economy, public servants are crucial to our society’s functioning, keeping us safe from crime, putting out fires, and teaching the next generation of productive citizens.  And it is only decent to sustain those who are truly in need.  But remember that we can only do what we can afford to do.  That is the mistake made by the Greeks – chronic overpromising, living beyond their means.

When the government expands the public sector or expands social benefits, these costs must be paid.  There are only two choices… by raising taxes now or raising taxes later.  In the latter case, we can borrow a surplus from the tribe in the next valley, but it must eventually be repaid (plus interest), which requires a future tax.

This is not meant to convince you to think in any given way, only to think.  When presented with economic alternatives, think.  Then choose.  But do so based on an informed consideration.