March 22, 2024
The New York Times ran one of its obligatory pieces on the horror story created by the growing government debt. The immediate instigation was a new report from the Congressional Budget Office that the debt to GDP ratio will hit a record high in 2029.
The piece included a paragraph on the horrors of this situation.
“‘This is yet another reminder that politicians put political priorities ahead of the long-term health of the country,’ Maya MacGuineas, president of the Committee for a Responsible Federal Budget, said in a statement. ‘There is no way to look at these eye-popping numbers without realizing we need to make a change.’ “
One way to improve the situation for those concerned about debt to GDP ratios is to adopt the old practice of tax farming. This was a practice common, among other places, in pre-revolutionary France. The government would sell off the right to collect a specific tax, such as a tariff at a particular port.
Selling off the right to collect a tax is a way to reduce the debt. It is a terrible economic practice, since privately collected taxes are likely to create a large amount of economic distortion and reduce output, but it does lower the debt. We can certainly go this route if it will make the people concerned about the government debt happier.
As a practical matter, the government still does something very similar to tax farming. It gives out patent and copyright monopolies that allow companies to charge prices that are hugely higher than the free market price.
The government uses these monopolies to pay for a large amount of innovation and creative work. They result in much higher prices for the protected items. In effect, we are allowing the beneficiaries of patent and copyright monopolies to charge a tax, just like in the good old days of tax farming, except instead of selling the right to collect the tax we are using the right to collect the tax as a way to pay for services the government wants performed.
And the neat thing about paying for services by issuing these monopolies is that it is entirely off the books. No one keeps track of the value of these monopolies, not even the deficit scolds who are always yelling at us about the need to reduce the deficit and debt.
It’s also important to recognize that we are talking about big bucks here. In the case of drugs alone, it is likely that the annual payments, due to higher drug prices, cost us more than $500 billion (1.8 percent of GDP) this year. We will spend more than $600 billion for drugs that would almost certainly cost us less than $100 billion in a free market. Drugs that can sell for tens of thousands for a year’s dosage would typically sell for a few hundred dollars in a free market.
The extra $500 billion a year that we pay for drugs comes to over $4,000 a family. It’s almost 60 percent of what the federal government will pay out in interest this year. And no one even knows about it. And this is just for drugs.
We pay hundreds of billions extra every year for items like software, smartphones, computers, video games, medical equipment, pesticides and fertilizers, and many other types of products because of these government granted monopolies. The total annual take from these rents is almost certainly well over $1 trillion, a sum that would far exceed current interest payments on the debt.
The country would surely be better off if the federal government paid out less money in interest every year. Those interest payments allow the beneficiaries to consume more than would otherwise be the case, leaving us with fewer resources for other consumption and investment.
The same story applies to the patent rents paid to drug companies, computer and software makers and the others who receive them. However, for some reason, we literally never hear a word in the media about these massive payments.
If the concern is really the drag that interest payments will be on the economy in future years, and that our children will somehow be less wealthy as a result (anyone hear of climate change?), then it makes zero sense to harp on interest payments and ignore patent and copyright rents.
Of course, if someone has a political agenda to reduce Social Security, Medicare, and other social programs, then this narrow focus would make sense. If this just a conceptual problem, and the deficit hawks can’t understand how patent rents and interest payments are two sides of the same coin, then maybe we should just do some large-scale tax farming to reduce the debt, and everyone can be happy.
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