Archive for February, 2013

what limits public debt

The fiscal cliff is coming back. If no agreement is reached prior to March 1, $85 billion in automatic spending cuts will take effect. That is just 2.3 percent of the total federal budget but enough to cause a stir.

Thus it might be of interest to review a study by two Swiss economists, Eichenberger and Stadelmann, in the Review of Law & Economics.

How Federalism Protects Future Generations from Today’s Public Debts

Their paper deals with a phenomenon called ‘capitalization’ and goes back to an article by Wallace E. Oates in the Journal of Political Economy in 1969 (link). The idea is that demand for property is negatively affected by taxes. That is to say, in areas with high taxes, property prices should be lower. And since taxes have to grow with the public debt burden, property prices should be lower in communities with higher debt. This observation has been described as government debt capitalizing into property values.

Eichenberger and Stadelmann argue that this debt capitalization in property values is more pronounced in case of local government debt (as compared to federal debt). This is because people can move to another community more easily than to another country. Thus, if a community is highly indebted, property prices have to decline substantially for people to decide to live and work there (they know that the government must raise taxes in order to pay for the debt). As a result, people who own property and pay taxes to their local community have a smaller incentive to vote in favor of debt-financed government expenditures.

The study concludes:

Debt capitalization provides for a natural and more effective brake for government debts at the local than at the central level. Thus, decentralized countries with a larger local budget share can be assumed to be less prone to opt for deficits and debts than centralized countries.

The United States, however, has moved away from being a nation of fifty fiscally individual states. Since 2000, government expenditure as a share of GDP has increased by only 1 percentage point at the state level, while growing 7 percentage points at the federal level (source). If this trend continues, the next fiscal cliff is just around the corner.


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Adding to my latest blog post, I found this quote by Thomas Sowell in his column “Random Thoughts” for the JWR:

In the modern welfare state, a vote becomes a license to take what others create – and these others include generations yet unborn.

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Beforehand, sorry for the rather long time without any new blog posts.

When criticizing current politics it is often argued that in a democracy the voting majority has supported various government interventions and that this ought to justify the interference.

Ayn Rand argues the opposite:

I object to the idea that people have the right to vote on everything. The traditional American system was a system based on the idea that majority will prevail only in public or political affairs and that it was limited by inalienable individual rights.

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2nd anniversary

Yesterday, this blog celebrated its second anniversary and I just like to once again thank all readers and commentators. Thousands of page views and ongoing economic discussions will provide enough incentive to continue the blog. Already, there are more than 330 posts in 77 categories with more than 200 comments.

Some readers told me that irregular posting is sometimes inconvenient. I am sorry for that but suggest to subscribe to this blog by entering your email address on the right-hand side. You will not receive any spam and you can unsubscribe any time.

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Currently I am reading Hayek’s Road to Serfdom. As a preview and taken from the Reader’s Digest version, here is a fine quotation:

We shall never prevent the abuse of power if we are not prepared to limit power in a way which occasionally may prevent its use for desirable purposes.

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Since 1995, from time to time the Pew Research Center has asked the American public whether they regard the government as a threat to freedom. While the wording has been changed slightly over time, the question is something like “Do you think the federal government threatens your own personal rights and freedoms, or not?”. The share of people who answered yes increased between 1995 and 2000, then dropped in the aftermath of 9/11, but has now reached an all-time high with 53 percent.

Is Government a Threat to Our Freedom?

As Barack Obama begins his second term in office, trust in the federal government remains mired near a historic low, while frustration with government remains high. And for the first time, a majority of the public says that the federal government threatens their personal rights and freedoms.

The finding reminds me of a famous quote by Thomas Jefferson (actually by John Basil Barnhill):

When governments fear the people, there is liberty.
When the people fear the government, there is tyranny.

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